Prepaid expenses: definition, journal entries and monthly amortisation, with a restaurant group example

Month-end at a restaurant group with three branches. The finance manager opens the income statement and finds that the Dammam branch lost more than SAR 200,000 in October, even though its sales were normal. The kitchen isn't the problem, and neither is the dining room: the whole year's rent (SAR 216,000) was booked as an expense in the month it was paid. For the next eleven months the branch will look more profitable than it is, because it will carry no rent at all.

That is the error prepaid expense accounting prevents: each month carries only its own share of the cost, so branches and months can be compared. This guide walks through the method step by step, with examples from the Saudi market.

What are prepaid expenses?

A prepaid expense is an amount paid (or payable) before the business receives the service or benefit. Because the benefit hasn't been used yet, on the payment date the amount is an asset, not an expense: the business has a right to a future service. As each month passes, part of that right is used up, and the used part moves from the asset to expenses. This applies the accrual principle of matching an expense to the period it belongs to, and it is the mirror image of accrued expenses, where the benefit is used first and paid for later.

Prepaid expenses sit in the balance sheet under current assets when the benefit ends within a year; any part that runs beyond a year is non-current.

Prepaid expenses examples in Saudi Arabia: what counts and what doesn't?

A note on rent. Most unlisted Saudi companies apply the IFRS for SMEs Standard as endorsed in the Kingdom. Under it, operating lease rent is expensed on a straight-line basis over the lease term, so the part paid in advance is a prepaid expense. Companies that apply full IFRS (IFRS 16) record leases longer than 12 months as a right-of-use asset and a lease liability; only short-term leases (12 months or less) stay in prepaid expenses, and only if the company elects the exemption. Ask your auditor which framework your company applies.

A note on GOSI. Social insurance contributions are calculated on the same month's wages, and GOSI asks employers to pay them within the first fifteen days of the following month. So they are recorded at each month-end as an expense with an accrued liability, not as a prepaid expense.

What is the prepaid expense journal entry?

Two entries: one when you pay, and one every month:

Monthly amortisation = amount before VAT ÷ number of months of benefit. If the period starts mid-month, either prorate the first month by days or set a company policy of starting from the following month, and apply it consistently.

To keep the numbers right, keep a prepaid expense schedule: one line per payment with the supplier, branch, expense account, start and end dates, amount, monthly charge and remaining balance. The total of the remaining balances must equal the prepaid account in the general ledger every month.

Worked example: three branches' rent for a restaurant group

A restaurant group (fictitious) has three branches, each on a 12-month commercial lease paid upfront. The landlords are VAT-registered, and the group applies the IFRS for SMEs Standard.

Payment entry for the Dammam rent (paid on 29 October 2026 against the tax invoice):

Nothing from the Dammam rent is charged to October, because the lease starts in November. That alone removes the phantom loss we started with.

November 2026 amortisation entry (one line per branch, so rent shows in the right branch's profit):

Remaining balance at 30 November 2026: Riyadh SAR 210,000 (after 5 of 12 months), Jeddah SAR 216,000 (after 3 months), Dammam SAR 198,000 (after one month). The total, SAR 624,000, must equal the prepaid rent account in the general ledger.

The Excel workbook in the kit is pre-filled with this example, plus an annual software subscription, a property insurance policy and a maintenance contract paid in November that starts in December, so you can see how it handles each case. If your group keeps these schedules by hand for each branch, see HAL pricing or book a demo.

How is VAT treated on advance payments in Saudi Arabia?

• When is VAT due? For continuous services paid for periodically, such as rent and subscriptions, Article 20 of the VAT Implementing Regulations makes the supply and the tax due on the payment due date, the date of actual payment or the invoice date, whichever is earliest. So a landlord usually issues the tax invoice for a year's rent when it is paid, not month by month.
• When do you deduct it? You deduct input VAT in the return once you hold a valid tax invoice (Article 49 of the Regulations), so in the invoice period, not spread over the amortisation months.
• What goes into the prepaid balance? The amount before VAT only. Deductible VAT is recorded in the input VAT account and is not amortised.
• When is there no VAT? Leasing residential property is exempt, as are life insurance contracts, and a landlord who is not VAT-registered charges no VAT. In those cases the full amount paid is the prepaid expense.

These are general points from the text of the Regulations, not tax advice. Check special cases with your tax adviser.

Month-end checklist for prepaid expenses

1. Add every new payment to the schedule: rent, insurance, subscriptions and contracts paid this month, with start and end dates and the branch.
2. Keep VAT separate: input VAT in its own account, the amount before VAT in prepaid expenses.
3. Post the amortisation entry per branch or cost centre, not one line for the group, so branch profitability is right.
4. Reconcile the schedule to the general ledger: the total of remaining balances equals the account balance; explain any difference before closing.
5. Review expired and renewed contracts: an expired contract that was not renewed must be at zero; a renewed one needs a new line.
6. Clear out misclassified items: supplier advances, refundable deposits and GOSI contributions do not belong in this account.

This checklist is part of the full month-end close, covered in the month-end closing process, which ends with the adjusted trial balance.

First 30 days: a prepaid schedule nobody has to chase

1. Week 1: collect every current lease, insurance policy and annual subscription for each branch, with tax invoices and start and end dates.
2. Week 2: enter them in the prepaid expense schedule (the kit workbook) and work out each item's remaining balance at the end of last month.
3. Week 3: compare the schedule total with the ledger balance, correct differences with one documented entry, and move misclassified items to the right accounts.
4. Week 4: close the current month from the schedule: amortisation entries per branch, then the reconciliation, then the checklist.

Download free: the prepaid expenses schedule kit

A ready-to-use kit with everything in this article:

• A HAL Guide (PDF) with the definition, what is and isn't a prepaid expense, the journal entries, VAT treatment, the full three-branch restaurant example, the month-end checklist, the first 30 days and printable blank forms.
• An Excel workbook with a prepaid expense register that works out the months, monthly charge and remaining balance automatically, a 24-month amortisation schedule, the month's ready-made entries (payments and amortisation per branch) and a reconciliation to the general ledger. The restaurant example is pre-filled.

From a spreadsheet to a system: amortisation entries for every branch in minutes

A spreadsheet works for twenty items. As branches and contracts multiply, keying amortisation entries every month becomes repetitive work where a line is easily missed. In HAL accounting, journal entries are automated with complete control over ledgers, expenses, journals and transfers can be processed in bulk, VAT reports are ready to file, and bank reconciliation is simpler. HAL connects to POS systems such as Foodics or Micros, and the HAL POSsible point of sale lets you see sales across all outlets in one place, so you read each branch's profit after it carries its right share of rent.

Frequently asked questions

What are prepaid expenses in simple terms?

Amounts paid today for a benefit in coming months, such as a year's rent, annual insurance or an annual subscription. They are recorded as a current asset when paid, and a portion is charged to expenses each month until the balance runs out.

What is the journal entry for a prepaid expense?

On payment: debit prepaid expenses (amount before VAT) and input VAT, credit bank. At each month-end: debit the related expense (rent or insurance), credit prepaid expenses with the month's share.

Are GOSI contributions prepaid expenses?

No. GOSI social insurance contributions are calculated on the month's wages and paid after it, so they are recorded at month-end as an expense with an accrued liability.

Is prepaid rent always a prepaid expense?

For companies applying the IFRS for SMEs Standard, yes, and it is amortised on a straight-line basis. For companies applying IFRS 16, leases longer than 12 months are recorded as a right-of-use asset and a lease liability, and only short-term leases stay in prepaid expenses if the company elects the exemption.

How is VAT treated on prepaid rent?

Input VAT is deducted in the period of the tax invoice, not spread over the amortisation months. Only the amount before VAT is recorded in prepaid expenses.

Is the prepaid expenses schedule kit free?

Yes. The kit is free: a PDF guide with printable forms and an Excel workbook that works out the monthly amortisation and remaining balance and prepares the month's entries per branch.