In business practice, companies sometimes decide to suspend their activity temporarily. This raises many questions about keeping the accounts correctly, especially when it comes to spreading costs over time. One of the most common issues is accounting for prepaid expenses (czynne rozliczenia międzyokresowe kosztów), such as insurance policies that were paid in advance but also cover the period of the suspension.
Suspending a business does not mean that all accounting obligations stop. Business owners must still follow certain accounting rules and correctly record the business events that occur during this period. A correct approach to prepaid expenses is particularly important, as they must continue to be settled despite the formal suspension of the business. The mirror image of these items is deferred income.
Suspending a business does not release the business owner from the obligation to keep accounting books if events with financial or property consequences occur. This applies in particular to prepaid expenses, which still need to be settled systematically in line with the matching principle
Legal basis for suspending a business
The rules on suspending business activity are set out in detail in the Entrepreneurs' Law (Prawo przedsiębiorców). Under Article 25 section 1 of that Act, during the suspension the entrepreneur may not carry out business activity or earn current revenue from non-agricultural business activity. However, this provision does not mean that the entity must refrain from every action related to its business.
The Act precisely defines the entrepreneur's rights and obligations during the suspension. Under Article 25 section 2 of the Entrepreneurs' Law, the entrepreneur retains a number of important rights and obligations during this time, which directly affect the keeping of accounting books.
During a suspension, the entrepreneur may carry out all activities necessary to maintain or secure the source of revenue, including terminating previously concluded contracts. The entrepreneur may also accept receivables and is obliged to pay liabilities that arose before the suspension date
The following rights and obligations of the entrepreneur during a suspension are particularly important from an accounting point of view:
- Carrying out activities necessary to maintain or secure the source of revenue, including terminating previously concluded contracts
- Accepting receivables and paying liabilities that arose before the suspension date
- Selling own fixed assets and equipment
- Taking part in court, tax and administrative proceedings related to business carried out before the suspension date
- Performing all obligations required by law
- Earning financial revenue, including from activity carried out before the suspension date
- Being subject to inspection on the terms applicable to entrepreneurs carrying out business activity
The Entrepreneurs' Law allows the entrepreneur to earn financial revenue during a suspension, including from activity carried out before the suspension date. This means that bank interest, dividends or other passive income can be received
Accounting obligations during a suspension
Keeping accounting books during a suspension is governed by the Accounting Act. Article 12 section 3b of that Act contains a provision that refers directly to the suspension of an entity's business. It states that accounting books need not be closed for a financial year in which the entity's business remained suspended throughout, unless the entity makes depreciation or amortisation write-offs or other events with financial or property consequences occur.
Events with financial or property consequences are all events that should be recorded in the company's accounting books despite the formal suspension. In business practice, these can be a variety of transactions and events.
The most common events that need to be recorded during a suspension include:
- Depreciation or amortisation write-offs on non-current assets (in the books – for tax purposes, assets not used because of the suspension are not depreciated from the month following the month of suspension: Article 16c point 5 of the CIT Act, Article 22c point 5 of the PIT Act)
- Sales of fixed assets or equipment
- Cash received, both in cash and to the bank account, for goods or services sold before the suspension
- Operating charges for rent, electricity, telephone, internet or bank fees
- Payment of public-law liabilities, for example property tax
- Passive income from bank interest on cash held
An entity may leave its accounting books open for a financial year in which its business remained suspended throughout, but only if no events with financial or property consequences occur. Otherwise, the obligation to close the accounting books at the end of the financial year remains in force
Rules for settling prepaid expenses during a suspension
Under the Entrepreneurs' Law, during a suspension the entrepreneur may not carry on current business activity, but may carry out activities necessary to maintain or secure the source of revenue. This rule has a direct impact on how prepaid expenses, such as insurance policies, are treated.
The mere fact that the business is interrupted because of a suspension does not affect whether prepaid expenses relating to insurance policies should be written off, as long as the cover under these contracts continues. This means a fundamental rule: if the entity is still covered by insurance under its policies, it continues to make write-offs of the prepaid expenses relating to these policies during the suspension as well.
The matching principle requires costs to be spread over time regardless of the suspension. Under Article 6 section 2 of the Accounting Act, to ensure that revenue and the related costs are matched, costs relating to future periods are included in the assets or liabilities of a given reporting period
The legal basis for prepaid expenses is Article 39 sections 1 and 3 of the Accounting Act. Under this provision, entities recognise prepaid expenses if they relate to future reporting periods, and prepaid expenses may be written off according to the passage of time or the volume of services. The timing and method of settlement should be justified by the nature of the costs, while observing the prudence principle.
Accounting standards and prepaid expenses
National Accounting Standard No. 4 "Impairment of assets" (Official Journal of the Minister of Finance of 2012, item 15) contains important guidance on operating prepayments. Under point 6.3.29 of this standard, the entity measures operating prepayments in accordance with Article 39 section 3 of the Accounting Act at the amount not yet settled as shown in the accounting books at the balance sheet date, while observing the prudence principle.
Showing prepaid expenses in the financial statements is justified when the entity has not changed its plans to benefit from services paid in advance and provided to it by other parties. In the case of a business suspension, it is particularly important to estimate correctly the periods in which the entity will continue to benefit from the contracts concluded.
In special situations, when the contract giving rise to the prepaid expenses cannot be terminated or does not provide for a refund of the sums paid in advance, the entity must assess in which periods it will still benefit from these services. The part of the prepayment that relates to the period beyond the time of actual benefit must be written off and constitutes an impairment write-down of these prepayments.
Adjustments to the rate at which prepaid expenses are settled affect the results of the following periods, starting from the next one, by charging the financial result. The entity must regularly assess whether it is justified to maintain prepaid expenses at the current level
Accounting entries for prepaid expenses
Correct accounting for prepaid expenses requires the use of appropriate accounts and a systematic approach to spreading costs over time. The cost of an insurance policy relating to future reporting periods is recorded in account 640 "Prepaid expenses" on the date the insurance contract is concluded.
The purchase of an insurance policy is recorded in the accounting books as follows:
| Accounting transaction | Debit account | Credit account | Description |
|---|---|---|---|
| Purchase of a policy | 640 Prepaid expenses | 249 Other settlements | Recording the purchase of the insurance policy |
| Monthly write-off | 406 Other costs by nature | 640 Prepaid expenses | Settling the part of the costs relating to the given month |
The write-off of prepaid expenses for a given settlement period requires a systematic approach. Each month in which the entity benefits from insurance cover should be charged with the corresponding part of the policy cost, regardless of whether the business is active or suspended.
A limited liability company (sp. z o.o.) took out an annual insurance policy for its company car for PLN 12,000 in January 2025. In April 2025, it suspended its business. Despite the suspension, the car still needs insurance, and the company continues to make monthly write-offs of PLN 1,000 throughout the term of the policy.
Systematic write-offs of prepaid expenses during a suspension are not only allowed, but actually required by accounting rules. This ensures that costs are correctly spread over time and the matching principle is observed
Practical aspects of settling insurance policies
In accounting practice, settling insurance policies during a suspension requires particular attention to several key aspects. First of all, you need to assess whether the insurance cover is still needed and whether the entity actually benefits from the insurance contract.
The most common types of insurance policies that need to continue to be settled during a suspension include:
- Motor insurance for company vehicles
- Insurance of property and non-current assets
- Third-party liability insurance
- Insurance of buildings and commercial premises
- Theft and burglary insurance
Each of these types of insurance may be justified even during a suspension, because it protects the entity's assets against various risks that may arise regardless of whether day-to-day business is carried on.
If there are doubts about whether it makes sense to keep certain insurance policies, the entity should consider cancelling or suspending them. However, if a policy cannot be cancelled or suspending it involves significant costs, continuing to settle it over time remains the appropriate accounting solution.
The decision to continue settling insurance policies over time should always be justified by the actual benefit of the insurance cover. The entity must regularly assess whether maintaining a given insurance is economically justified
Control and review of prepaid expenses
Keeping prepaid expenses correct during a suspension requires systematic control and review. The entity should regularly review its prepaid expenses and assess whether it is justified to maintain them.
The review of prepaid expenses should cover the following elements:
- Checking whether insurance contracts and other contracts giving rise to prepaid expenses are still current
- Assessing whether it is justified to maintain individual types of insurance
- Checking that the monthly write-offs are calculated correctly
- Checking that write-offs are booked on time
- Analysing the balance of account 640 "Prepaid expenses"
- Reviewing the source documentation for the contracts concluded
Particular attention should be paid to contracts that can be terminated or suspended without significant costs. In such cases, the entity should consider whether maintaining the insurance is economically justified during the suspension.
A trading company had professional liability insurance costing PLN 24,000 a year. After suspending its business in May 2025, the company analysed whether it made sense to keep this insurance. As it was no longer carrying on day-to-day trading, it decided to cancel the policy at the end of May, settling the costs for January–May proportionally.
Documentation and archiving during a suspension
Keeping proper accounting documentation during a suspension is just as important as when the business is active. All transactions relating to prepaid expenses must be properly documented and archived in line with the requirements of the Accounting Act. Our accounting firm in Warsaw keeps clients' accounting books during a suspension as well.
The documentation for prepaid expenses should include:
- Originals of insurance contracts and other contracts giving rise to prepaid expenses
- Invoices and other documents confirming that the costs were incurred
- Calculations of the monthly write-offs of prepaid expenses
- Accounting documents confirming the write-offs
- Correspondence with insurers and other business partners
- Analyses of whether it is justified to maintain individual types of insurance
The obligation to keep accounting documentation during a suspension remains the same as when the business is active. Documents must be kept for at least 5 years, counting from the beginning of the year following the financial year to which they relate, and documents relating to commercial contracts – for 5 years from the beginning of the year following the year in which the contracts were finally settled (Article 74 sections 2 and 3 of the Accounting Act); for tax purposes – until the tax liability becomes time-barred (Article 86 § 1 of the Tax Ordinance Act (Ordynacja podatkowa))
Impact of the suspension on financial reporting
Suspending a business has a significant impact on how information is presented in the financial statements. Prepaid expenses continued during the suspension must be properly shown in the balance sheet and in the profit and loss account.
In the balance sheet, prepaid expenses are shown in assets – under "Long-term prepayments and accrued income" (non-current assets) and "Short-term prepayments and accrued income" (current assets). Their value should reflect the actual amount of costs relating to future periods, taking into account any impairment write-downs.
In the profit and loss account, regular write-offs of prepaid expenses are charged to the financial result under the relevant item of costs by nature (for example, policies – "Other costs by nature"), and impairment write-downs of these prepayments – under "Other operating expenses" (National Accounting Standard No. 4 point 6.3.30). Even during a suspension, these costs affect the entity's financial result.
In addition, in the notes to the financial statements, the entity should provide information on:
- The rules for measuring and settling prepaid expenses
- Significant changes in the level of prepaid expenses
- The impact of the suspension on the accounting policy
- Significant events that occurred during the suspension
