Prepaid expenses2/19/2023 ![]() ![]() Whether you’re new to F&A or an experienced professional, sometimes you need a refresher on common finance and accounting terms and their definitions. ![]() A prepaid expense is a type of asset on the balance sheet that results from a business making advanced payment for the provided goods and services that would be received in the future. Prepaid expenses entry, represent expenditures that have not been recorded by a company as an expense but have been paid for in advance. As the benefits of the good or service are realized over time, the asset’s value is decreased, and the amount is expensed to the income statement. The business records a prepaid expense as an asset on the balance sheet because it represents a future benefit due to the business. Prepaid expenses usually relate to the purchase of something, such as rent or insurance, that provides value to the business over several accounting periods. Prepaid expenses are considered current assets because they are amounts paid in advance by a business in exchange for goods or services to be delivered in the future. Example – Journal Entry for Prepaid Salary or Wages.“Why is it easier for someone to perpetrate fraud using a journal entry than with a ledger?”. ![]() You can post the above entry month wise or single entry on financial year end and remaining balance will appear under current assets of $5,000. Insurance Expenses Account Dr $7,000 (Under Expenses) You have to post adjustment entry on proportionate basis for current financial year i.e. Year end adjustment/reverse entry 31-03-2017 To Bank Account $12,000 (Under Bank Accounts) Prepaid Insurance Account Dr $12,000 (Under Current Assets) Generally insurance paid on monthly or year basis.Įxample, Prepaid insurance paid by ABC Company for the period 1 st September 2016 to August -2017 of $12,000 and the ABC financial year is April to March. You can post month wise adjustment entry like above or post year end single adjustment entry for six months as shown above and the remaining balance will appear under current assets. as per the company financial year (Apr – Mar) you have to record rent expenses of $60,000 for the period of October 2016 to March 2017. You have to record expenses on proportionate basis i.e. Office Rent Account Dr $60,000 (Expenses Account) Or, you can post single adjustment entry for the whole year, as per the above example you can post adjustment entry for six months on ($10,000*6 =$60,000)Īdjustment entry for the financial year 2016 -2017 Office Rent Account Dr $10,000 (Expenses Account) Rent paid adjustment entry for the October 2016 To Bank or Cash $1,20,000 (Under Bank Accounts) Prepaid Rent Account Dr $1,20,000 (Under Current Assets) You have to post October-2016 rent expenses on October month end adjusting/ reversing against to prepaid expenses (Balance Sheet A/c). There are two accounts involves to record the prepaid expense entry, initially you have to record under current assets, but these prepaid expenses are become expenses over the period.Īccording to the accounting rules prepaid expenses are debit (Asset) and credit to the cash or bank accountĪBC company has paid one year advance rent of $1,20,000 on 1st October 2016 and ABC has to pay every month rent of $10,000 and the company financial is April to March. Prepaid expenses are shown on the balance sheet under asset side. Prepaid expenses are future expenses paid in advance but which has not yet been incurred during the current period. ![]()
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