SAP FUNCTIONALITY FOR ACCOUNTING OF PREPAID EXPENSES
A prepaid expense is an expense that is paid in advance, such as
rent or insurance. When a company pays for a prepaid expense,
the payment is recorded as an asset on the balance sheet. The
expense is not recognized as an expense until it is used or
consumed, which is typically over a period of time. To
recognize the expense over the period of time, accruals and
deferrals are used.
There are several alternatives available for accounting of prepaid
expenses in SAP. Here are three common methods:
a) Recurring Documents: This method involves
creating a recurring document to automatically post
the prepaid expense each month. The recurring
document can be set up to post the same amount each
month, or it can be set up to post varying amounts
based on a defined pattern or formula. This method is
also automated but may be less flexible than the
Accrual Engine method.
b) Accrual Engine: This method involves creating an
accrual object and using it to record the prepaid
expense. The Accrual Engine calculates and posts the
accrual amounts each month based on the posting
rules defined for the object. This method provides a
more automated and streamlined approach to
recording and managing prepaid expenses.
c) Manual Entries: This method involves manually
posting the prepaid expense each month using
journal entries. This method provides the most
flexibility, but also requires more manual effort and
is more prone to errors.
Ultimately, the method chosen will depend on the specific needs
and preferences of the company. The Accrual Engine is often
the preferred method due to its automation and flexibility, but it
may require more setup and configuration compared to the other
methods. Recurring documents can be a good option for simpler
prepaid expenses that require less flexibility, while manual
entries may be the best choice for companies with unique
requirements or for one-time prepaid expenses
A. ACCOUNTING USING RECURRING ENTRIES-
a) Create a Purchase Order (PO) for the prepaid
expense using transaction code ME21N. Enter the
vendor, material, quantity, and amount details for the
prepaid expense in the PO.
b) Create a GL account for prepaid expenses using
transaction code FS00. Enter the account group,
description, and other relevant details for the GL
account. Save the GL account.
c) Create a recurring document for the prepaid expense
using transaction code FBD1. Enter the recurring
document details, such as the account codes,
amounts, and frequency of posting. Save the
recurring document.
d) Set up the recurring entry run using transaction code
F.14. Enter the posting date range and the recurring
document number. Run the recurring entry.
e) At the end of the prepaid expense period, create a
clearing document to clear the prepaid expenses
account. Use transaction code F.13 to create the
clearing document. Enter the account codes and
amounts for the prepaid expenses account.
f) Post the clearing document using transaction code
FB01. Enter the document number and select the
posting period. Save the document.
The illustrative example is as follows:-
Suppose a company has a prepaid expense for rent for the next
six months, starting from January 1, 2023. The prepaid expense
is $12,000, which is paid upfront on January 1, 2023. The
company wants to use recurring documents to record this
prepaid expense.
1. Create a Purchase Order (PO) for the prepaid expense
using transaction code ME21N. Enter the vendor, material,
quantity, and amount details for the prepaid expense in the
PO.
Account Entry:
Debit: Prepaid Expenses (Asset) - $12,000
Credit: Bank Account (Liability) - $12,000
2. Create a recurring document using transaction code FBD1
for the prepaid expense. Enter the relevant details for the
recurring document, such as the account assignment,
posting frequency, and the amount to be posted each
month. In this case, we will create a recurring document
for $2,000 to be posted each month for the next six
months.
Account Entry:
Debit: Rent Expense (Expense) - $2,000
Credit: Prepaid Expenses (Asset) - $2,000
3. Post the recurring document using transaction code F.14
for the first month, January. Select the recurring document
and the posting period for January. The recurring
document will post the prepaid expense for January
automatically.
Account Entry:
Debit: Rent Expense (Expense) - $2,000
Credit: Prepaid Expenses (Asset) - $2,000
4. Create an amortization document for the prepaid expense
for January using transaction code F-02. Enter the account
information for the prepaid expense and the amount to be
amortized, which is $2,000. Select the posting period for
January.
Account Entry:
Debit: Rent Expense (Expense) - $2,000
Credit: Prepaid Expenses (Asset) - $2,000
5. Post the amortization document for January using
transaction code FB03. Enter the document number and
select the posting period for January. Save the document.
Account Entry:
Debit: Rent Expense (Expense) - $2,000
Credit: Prepaid Expenses (Asset) - $2,000
6. Repeat steps 3-5 for the remaining months, February to
June, to record the prepaid expense for each month.
7. At the end of June, the prepaid expense should be fully
amortized and there should be no remaining balance in the
Prepaid Expenses account.
B. ACCOUNTING USING ACCRUAL ENGINE
Recording prepaid expenses in SAP S/4HANA is done using the
accrual engine. The accrual engine allows you to create accrual
objects that will be used to record prepaid expenses. Here are the
steps to record prepaid expenses in SAP S/4HANA using the
accrual engine:
1. Create a Purchase Order (PO) using transaction code
ME21N for the prepaid expense. Enter the vendor,
material, quantity, and amount details for the prepaid
expense in the PO.
2. Create an accrual object using transaction code FBU3.
Enter the relevant details for the accrual object, such as the
company code, the posting date, and the account
assignment details.
3. Assign the PO to the accrual object by clicking on the
"Assignments" tab and selecting the PO number in the
"Purchase Order" field.
4. Create an invoice for the prepaid expense using transaction
code MIRO. Enter the vendor, PO number, and other
relevant details for the invoice. Save the invoice.
5. Post the accrual for the prepaid expense using transaction
code F.81. Select the accrual object and the posting period
for the accrual. Enter the amount of the prepaid expense as
the accrued amount.
6. Post the invoice for the prepaid expense using transaction
code FB03. Enter the invoice number and select the
posting period for the invoice. Save the invoice.
7. Create an amortization document for the prepaid expense
using transaction code F-02. Enter the account information
for the prepaid expense and the amount to be amortized.
Select the posting period for the amortization document.
8. Post the amortization document using transaction code
FB03. Enter the document number and select the posting
period for the amortization document. Save the document.
The illustrative example is as follows:-
Assume that a company pays $12,000 for rent for a warehouse
for the next 12 months in advance on January 1, 2023. The
company uses the accrual engine to amortize the rent expense
over the 12-month period. The monthly rent expense is $1,000
($12,000/12 months).
Step 1: Create a PO and post a GRN
The first step is to create a PO for the prepaid rent expense and
post a GR to confirm that the rent has been received. The
following entries are posted:
Debit Prepaid Rent Account for $12,000
Credit Cash/Bank Account for $12,000
When the GR is posted, the following entries are posted:
Debit Rent Expense Account for $12,000
Credit Prepaid Rent Account for $12,000
Step 2: Set up the Accrual Engine
The next step is to set up the accrual engine to amortize the
prepaid rent expense over the 12-month period. The accrual
engine will automatically create the journal entries for the
amortization.
Step 3: Monthly Amortization
At the end of each month, the accrual engine calculates the
amount of the rent expense that should be recognized for the
month and creates the journal entries. The following entries are
posted at the end of the first month (January 31, 2023):
Debit Rent Expense Account for $1,000
Credit Prepaid Rent Account for $1,000
The same entries are posted at the end of each month until the
end of the 12-month period.
Step 4: Final Amortization
At the end of the 12-month period, the prepaid rent account
should be fully amortized. The following entries are posted:
Debit Rent Expense Account for $12,000
Credit Prepaid Rent Account for $12,000
Both recurring documents and the accrual engine can be used to
record prepaid expenses in SAP S/4HANA, but there are some
differences in how they work and how they affect the financial
statements.
Recurring documents are used to post the same document
repeatedly over a period of time. They are typically used for
transactions that occur on a regular basis, such as monthly rent
payments or utility bills. Recurring documents can be created in
advance and scheduled to post automatically, which can save
time and reduce errors.
The accrual engine, on the other hand, is used to record
expenses that have been paid in advance but will be used or
consumed over a period of time. Prepaid expenses such as
insurance premiums or prepaid rent can be recorded using the
accrual engine. The accrual engine creates an accrual object that
represents the prepaid expense and then posts an accrual
document to record the expense in the current period.
Here are examples of how recurring documents and the accrual
engine can be used to record prepaid expenses:
Example 1: Recording monthly rent payments
Let's say a company pays rent of $1,000 per month. They can
record the rent payments using recurring documents or the
accrual engine.
 Using recurring documents: The company can create a
recurring document for the rent payment and schedule it to
post automatically each month. The recurring document
will post the same entry each month, which will increase
the rent expense account and decrease the cash account.
 Using the accrual engine: If the company pays rent for
three months in advance, they can use the accrual engine to
record the prepaid rent. They would create an accrual
object for the prepaid rent and post an accrual document
for the current period. The accrual document would
increase the rent expense account and create a liability for
the prepaid rent. The prepaid rent liability would be
reduced each month as the rent expense is amortized.
Example 2: Recording annual insurance premiums
Let's say a company pays an annual insurance premium of
$12,000. They can record the insurance premium using
recurring documents or the accrual engine.

 Using recurring documents: The company can create a

recurring document for the insurance premium and
schedule it to post automatically each month. The
recurring document would post a portion of the insurance
premium each month, which would increase the insurance
expense account and decrease the cash account.
 Using the accrual engine: If the company pays the
insurance premium in advance, they can use the accrual
engine to record the prepaid insurance. They would create
an accrual object for the prepaid insurance and post an
accrual document for the current period. The accrual
document would increase the insurance expense account
and create a liability for the prepaid insurance. The prepaid
insurance liability would be reduced each month as the
insurance expense is amortized.

In general, the accrual engine is a more appropriate method for

recording prepaid expenses because it better reflects the timing
of the expense and the associated liability. Recurring documents
are better suited for transactions that occur on a regular basis,
such as rent payments or utility bills.