Recording and Managing Prepaid Expenses in D365 Business Central

Managing prepaid expenses accurately is crucial for maintaining financial integrity and ensuring compliance with accounting standards. In Microsoft Dynamics 365 Business Central (D365 BC), the process is streamlined using deferral codes — a powerful feature that automates expense recognition over time.

In this blog, we’ll walk you through the complete prepaid expenses process in Business Central, including setup, posting, and reporting.

What Are Prepaid Expenses?

Prepaid expenses are payments made in advance for goods or services to be received in the future. Common examples include:

• Rent
• Insurance premiums
• Software subscriptions
• Maintenance contracts

Rather than recording the full amount as an expense upfront, it must be allocated (deferred) over the relevant accounting periods.

Why Use Business Central for Prepaid Expenses?

With D365 BC, you can:

• Automate deferral entries
• Ensure accurate financial reporting
• Reduce manual effort
• Avoid errors in revenue and expense recognition

Step-by-Step: Prepaid Expenses Process in Business Central

Step 1: Create or Assign a Prepaid Expense G/L Account

Create a G/L Account:

• No.: 1004720012 (assumed)
• Name: Prepaid Expenses
• Category: Current Assets → Prepaid Expenses

You can optionally assign a deferral template to this account.

Step 2: Set Up Deferral Templates

Deferral templates define how and over how many periods an expense should be recognized.

1. Search for: Deferral Templates
2. Create a New Template
   • Code: Expenses
   • Description: Prepaid Expenses

2. Deferral Account Type: G/L Account (1004720012)
3. Deferral %: 100%
4. Calc. Method: Equal per period (select from dropdown)

2. Starting Date: Beginning of Period (select from dropdown)
3. No. of Periods: 12
4. Period Length: 1M
5. Period Description: Deferred expenses for %4 %6 (The month name and the fiscal year of the period posting date)

Step 3: Post a Purchase Invoice

1. Create a Purchase Invoice from the vendor.
2. On the  Purchase line level, add the deferral code by using personalization

• Before posting, View the Deferral Schedule

         To see the automatic schedule:

•  Review the expenses have been recognized according to calc, method ( based on the number of days in the month).
•        Post the invoice.

Behind the Scenes: Business Central creates deferral entries automatically, posting the full amount to the prepaid G/L account and scheduling periodic expense recognition.

Step 4: Track and Report Prepaid Balances

Use Account Schedules and Trial Balance reports to monitor prepaid balances and ensure they are amortized correctly over time.

Example

Let’s say you pay Rs. 1,200 for a 12-month insurance policy in January.

Journal Entries:

At time of posting:

• Dr. Prepaid Insurance (Asset) — Rs. 1,200
• Cr. Accounts Payable — Rs. 1,200

Monthly deferral (automated):

• Dr. Insurance Expense — Rs. 100
• Cr. Prepaid Insurance (Asset) — Rs. 100

This continues monthly until the prepaid balance is fully expensed.

Benefits of Using Deferrals in Business Central

• Automation: Reduces manual entries and errors
• Accuracy: Ensures expenses are matched to the correct period
• Visibility: Deferral schedules offer full transparency
• Compliance: Supports GAAP and IFRS principles

Final Thoughts

Managing prepaid expenses in Business Central is efficient and straightforward thanks to deferral templates. Whether you’re a small business or a growing enterprise, this feature ensures that your expense recognition process is compliant, automated, and reliable.