In governmental accounting, the presentation of prepayments and immaterial inventory supplies on the fund statements balance sheet (using the current financial resources measurement focus) is optional. The balance sheet only includes financial assets, defined as cash or something that will convert to cash in due course. Prepayments and immaterial inventory supplies can fall in this category because they avoid the need for a near-term cash outlay, but GASB makes this optional.
If you do choose to include your prepayments and immaterial inventory supplies on the face of your governmental fund balance sheet, then you should disclose in your summary of significant accounting policies the method for recognizing the expenditure, either the purchase method or consumption method. The purchase method is the method by which expenditures for prepayments and supplies inventory are recognized when incurred. The consumption method is the method in which expenditures are recognized in the period benefited by the prepayment or when inventories are actually used.
Recording your prepaid expenditures/inventory and disclosing the methods used for those items in your fund statement balance sheet will make it easier to convert your governmental activities into the full accrual statement of net position later. In either case, you have the option to record or not record.
Brian Hemmerle, CPA, CFE