What Is Prepaid Expenses?
A Prepaid Expenses is a kind of asset at the balance sheet that effects from an enterprise making superior payments for items or offerings to be acquired with inside the future. Prepaid costs are to start with recorded as assets, however their price is expensed over time onto the profits statement. Unlike traditional costs, the enterprise will get hold of something of value from the prepaid expenses over the direction of numerous accounting periods.
Prepaid expenses constitute prices which have not but been recorded by a corporation as an expense, however were paid for in advance. In different words, prepaid prices are prices paid in a single accounting period, however will not be identified till a later accounting period. Prepaid expenses are to start with recorded as assets, due to the fact they’ve destiny financial advantages, and are expensed on the time when the advantages are realized the matching principle.
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prepaid expenses meaning
Companies make deposits for items or offerings together with leased workplace equipment or coverage insurance that offer persistent advantages over time. Goods or offerings of this nature can’t be expensed right now due to the fact the price could not line up with the advantage incurred through the years from the use of the asset.
According to generally accepted accounting principles (GAAP), expenses have to be recorded with inside the equal accounting duration because the advantage generated from the associated asset. Recording a complicated charge made for the lease as an expense with inside the first month might not safely in shape fees with sales generated from its use. Therefore, it has to be recorded as a prepaid expense and allocated out to expense over the total 12 months.
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What is the example of Prepaid Expenses?
Suppose XYZ Company purchases coverage for the approaching 12-month period. It pays $120,000 prematurely for the coverage policy. XYZ Company will first of all book the full $120,000 as a debit to prepaid insurance, an asset at the balance sheet, and a credit to cash. Each month, an adjusting access could be made to expense $10,000 (1/12 of the prepaid amount) to the earnings announcement via a credit to prepaid insurance and a debit to insurance expense. In the twelfth month, the final $10,000 could be absolutely expensed and the prepaid account could be zero.
Prepaid Expenditure is an expense-paid in a single Accounting Year, however the advantages of the identical are consumed in extra than once Accounting Year. Only Expenses which can be due and incurred in a single accounting 12 months may be debited to Profit & Loss A/c. Rest all of the payments made which relate to the destiny need to be grouped under Prepaid Expenses with inside the Balance Sheet.
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