A company may pay for goods or services before they have been received. Any amounts that have been paid for goods and services not received by the end of an accounting period are shown in the balance sheet as prepayments. These amounts will not be shown as costs in the P & L.

When the goods or services are received, then the amounts will be passed through the P & L and deducted from the prepayments section of the balance sheet.

This is necessary in order to accrue the costs involved to the correct accounting period.