Accounting for prepaid expenses – Account 242 according to Circular 200

Let’s find out: What is account 242, the structure of account 242, the content reflected in account 242 and how to account for prepaid expenses – account 242 according to Circular 200. 

Every business is concerned with issues related to costs. To account for infrastructure rental costs, operating rent, insurance equipment costs, prepaid expenses, etc., accountants need to understand the general provisions of the law. Below is an article explaining in detail the structure and accounting method of account 242.

I. What is account 242? 

Account 242 is used to reflect actual costs incurred related to many accounting periods and the transfer of these costs to production and business costs of the following accounting periods.

II. Cases and contents reflected are account 242 according to Circular 200

• Prepaid expenses for infrastructure rental, office rental, fixed asset operating rental (land use rights, factories, warehouses, offices, stores and other fixed assets) serving production and business in many accounting periods;
• Establishment, training and advertising costs incurred in the pre-operational period are allocated over a maximum of 3 years;
• Insurance costs (fire insurance, civil liability insurance for vehicle owners, auto insurance, property insurance, etc.) and fees that businesses purchase and pay at once for many accounting periods;
• Tools, equipment, packaging, and supplies for rent related to business operations over multiple accounting periods;
• Prepayment of borrowing costs for interest on loans or bond interest upon issuance;
• Fixed asset repair costs that arise once and have a large value, the enterprise does not provision in advance for major fixed asset repair costs, and allocates them for a maximum of 3 years;
• The difference between the selling price and the remaining value of the fixed asset sold and leased back is a financial lease;
• The difference between the selling price and the remaining value of the fixed asset sold and leased back is an operating lease;
• In case of business consolidation that does not result in a parent company-subsidiary relationship that creates commercial advantages or when equitizing a state-owned enterprise that creates business advantages;
• Prepaid expenses are used for multiple accounting periods;
• The allocation of prepaid expenses into production and business expenses for each accounting period must be based on the nature and extent of each type of expense to select a reasonable allocation method and criteria;
• Accountants must keep detailed track of each prepaid expense according to each prepaid period that has arisen before, has been allocated to the cost-bearing objects of each accounting period and the remaining amount that has not been fully allocated to expenses;
• For prepaid expenses in foreign currency, in cases where at the time of reporting there is certain evidence that the seller cannot provide goods, services, assets and the enterprise will definitely receive back the prepaid amounts in foreign currency, they are considered foreign currency-based monetary items and the accountant must re-evaluate them according to the actual transaction exchange rate at the time of reporting (which is the transfer buying rate of the bank where the enterprise regularly conducts transactions).

III. Structure and content of accounting for prepaid expenses – Account 242

• Debit: Prepaid expenses actually incurred during the period.
• Credit: Prepaid expenses have been included in the operating expenses of the period.
• Debit balance: Prepaid expenses not included in production and business operating expenses during the period.

IV. Methods of accounting for account 242 Circular 200 – Prepaid expenses

1. Prepaid expenses incurred must be allocated over many periods.

Debit account 242: Prepaid expenses incurred;

Debit account 133: Deductible value added tax (if any);

There are accounts 111, 112, 153, 331, 334, 338…

Periodic cost allocation:

Debit account 154: Production and business expenses during the period;

Debit account 635: Financial expenses;

Debit account 641: Selling expenses;

Debit account 642: Management expenses;

Credit account 242: Prepaid expenses during the period.

2. Infrastructure leasing, fixed asset leasing under the operating lease method and for multi-term production and business services

Debit account 242: Prepaid expenses (facility rental, assets…);

Debit account 133: Deductible value added tax (if any);

Credit account 111, 112: Cash payment, bank transfer.

Note: If VAT is not deductible, add it to the prepaid expenses.

Periodic cost allocation:

Debit account 642: Management expenses;

Credit account 242: Prepaid expenses.

3. For tools and equipment related to the unit’s production and business activities over many periods, when used or rented out

Debit account 242: Prepaid expenses (cost of tools, equipment, etc.);

Account 153: Export of tools and equipment warehouse.

• Periodically allocate the value of tools, equipment, packaging, and rental supplies that have been released from the warehouse according to reasonable criteria. The basis for determining the cost to be allocated each period may be the time of use that the tools, equipment, packaging, and rental supplies participate in production and business activities. When allocating, record:

Debit account 154, 641, 642: Record into expenses according to purpose of use;

Credit account 242: Prepaid expenses.

4. In case of purchasing assets and investment real estate by deferred payment or installment payment

• When an enterprise purchases tangible fixed assets, intangible fixed assets or investment real estate by deferred payment or installment payment and uses it immediately for production and business activities or to hold for price increase or lease for operations, record:

Debit accounts 211, 213, 217 (original value of assets recorded at cash purchase price);

Debit account 133: Deductible value added tax (if any).

Debit account 242: Prepaid expenses (late interest on the difference between the total amount payable minus (-) the purchase price paid in cash minus (-) deductible value added tax (if any)).

Credit account 331: Payable to seller (total payment value).

• When making payment to the seller, the accountant records:

Debit account 331: Payable to seller (total payment value);

There are accounts 111, 112: Total amount payable in cash or by bank transfer.

• Periodically, late payments and installment payments are included in business expenses, and the accountant records:

Debit account 635: Financial expenses;

Credit account 242: Prepaid expenses.

5. In case the cost of repairing fixed assets is large, the unit does not provision in advance for the cost of repairing fixed assets but must allocate the cost to many accounting periods, then when the repair work is completed

• Transfer fixed asset repair costs to prepaid expense account, record:

Debit account 242: Prepaid expenses;

Credit account 241: Construction in progress (2413).

• Periodically, calculate and allocate fixed asset repair costs into production and business operating expenses during the period, record:

Debit account 642: Management expenses;

Credit account 242: Prepaid expenses.

6. In case the enterprise pays interest in advance when borrowing

• When a business pays interest in advance, record:

Debit account 242: Prepaid expenses;

There are accounts 111, 112.

• Periodically, when allocating loan interest according to the amount payable for each period to financial expenses or capitalizing it into the value of unfinished assets, record:

Debit account 635: Financial expenses (borrowing costs recorded in production and business operating expenses during the period);

Debit account 241: Construction in progress (if borrowing costs are capitalized into the value of unfinished construction investment assets);

Debit account 627: General production costs (if borrowing costs are capitalized into the value of assets in progress);

Credit account 242: Prepaid expenses.

7. When issuing bonds at par value to raise capital, if the enterprise pays the bond interest in advance immediately upon issuance

• At the time of issue, note:

Debit accounts 111, 112: Total revenue;

Debit account 242: Prepaid expenses (prepaid bond interest);

Credit account 34311: Face value of bonds.

• Periodically, allocate prepaid bond interest for each borrowing period:

Debit account 635: Financial expenses (if any, included in financial expenses during the period);

Debit account 241: Construction in progress (if capitalized into the value of unfinished basic construction investment assets);

Debit account 627: General production costs (capitalized into the value of unfinished production assets);

Credit account 242: Prepaid expenses (details of prepaid bond interest) (bond interest allocated during the period).

8. In case of business consolidation that does not result in a parent-subsidiary relationship (purchase of net assets), at the date of purchase if there is any commercial advantage

• If the purchase or sale during a business merger is paid by the buyer in cash or cash equivalents, record:

Debit accounts 131, 138, 152, 153, 155, 156, 211, 213, 217… (recorded at fair value of purchased assets);

Debit account 242: Prepaid expenses (details on commercial advantage);

There are accounts 331, 3411… (recorded at fair value of payables and potential liabilities);

There are accounts 111, 112, 121 (total amount of money or cash equivalents paid by the buyer).

• If the purchase or sale in a business combination is made by the buyer issuing shares, record:

Debit accounts 131, 138, 152, 153, 155, 156, 211, 213, 217… (recorded at fair value of purchased assets);

Debit account 242: Prepaid expenses (details on commercial advantage);

Debit account 4112: Share capital surplus (issue price is less than par value);

Credit account 4111: Owner’s capital contribution (at par value);

There are accounts 331, 3411… (recorded at fair value of payables and potential liabilities);

Credit account 4112: Share capital surplus (issue price greater than par value).

9. The amount of exchange rate difference losses that enterprises have not fully allocated. The accumulated losses in the period before operation must be transferred entirely from the monitored account 242 to account 635, to determine the business performance results in the period.

Debit account 635: Financial expenses;

Credit account 242: Prepaid expenses.

10. When taking inventory of assets at the time of determining the enterprise value for equitization of 100% state-owned enterprises, if the prepaid land rental does not meet the criteria for recording intangible fixed assets, it is assessed as increasing state capital.

Debit account 242: Prepaid expenses;

Credit account 411: Owner’s investment capital.

11. When taking inventory of assets at the time of determining the enterprise value for equitization of 100% state-owned enterprises, if the actual value of state capital is greater than the book value of state capital, the accountant shall record an increase in state capital and record the difference as a business advantage.

Debit account 242: Prepaid expenses;

Credit account 411: Owner’s investment capital.

12. Business advantages arising from equitization of state-owned enterprises are accounted for in account 242 and gradually allocated, not exceeding 3 years.

Debit account 642: Management expenses;

Credit account 242: Prepaid expenses.

V. Frequently asked questions about accounting for account 242 – Prepaid expenses