Prepayments are monies paid in the current accounting period for goods or services which will be used by the business in the following period. Therefore, such prepayments need to be excluded from the costs in the current period. All goods received during the year must be accounted for. Payments for goods and services received during the current year ONLY are accounted for. This represents a measure of wearing out of the fixed asset.
Depreciation is to be deducted as an expense in the profit and loss account.
These amounts must also be deducted from the amounts shown in the balance sheet. There is a general feeling that some of the customers might not be able to pay up in the coming year. You must also therefore deduct this amount from debtors in the balance sheet. The only part of that relevant to the year ended 31.12.98 is December 98 which is one month out of the three months which the bill relates to.