Entries in the books of accounts - AMC

[Adoni Raghavendra]

In the normal course of accounting we account the expenses incurred so chargeable to the current year as expenses and rest as prepaid expenses. Now the question is about when we have given an AMC{Annual Maintanance Contract]and payment for the said contract is yet not released, what would be the entries to be passed in the books of account.[i.e, AMC period starts from 15.08.2008 to 14.08.09].

[DEV KUMAR KOTHARI]

For annual expenses, best and easy course is to take accural date as date of renewal and charge expenses in a/c on date of renewal. This can be for AMC, insurance, rates and taxes, annual retainership etc. Since you have followed matching principal, last years prepaid will be charged to expenses of this year, this years expenses can be charged if paid before 31.03.09 and balance as prepaid.If not paid by 31.03.09 provide liability for this yeaars expenses, in next year on payment charge against liability so provided and balance as current expenses. Again on next renewal on 15.09.09 you have to adjust for current exp. and prepaid expenses. if you change accrual on renewal date basis, there will be impact in first year, then it will be usual course of accounting one years expenses.

[RAJESH SAWHNEY]

Repairs to be debited by expenses from 14/8/08 till 31/3 and rest to prepaid expenses. Liability for whole of the amount should be created

AI Summary

Matching principle in accrual accounting dictates recognising AMC expenses by period and accruing unpaid year end liability.
Accounting for an AMC spanning two years requires applying the matching principle: charge the portion of the contract period that falls in the current year to expense and treat the remainder as prepaid; if unpaid at year-end, recognise a liability (accrual) for the current year's expense and adjust that liability on payment or at next renewal.