The pre paid rent journal entry would be as follows: Date
No insurance company would sell insurance that covers all the expenses after the unfortunate incident, so expenses must be prepaid.Īs discussed all that it is, is cash paid in advance for a particular period like a quarter, year, month etc. For example, insurance will always be a prepaid expense as it provides financial protection in the event of any unfortunate incident in the future. Due to the nature of certain goods and services, prepaid expenses will always exist.
Therefore, it should be recorded as a prepaid expense and allocated out to expense over the full twelve months. Recording an advanced payment made for the lease as an expense in the first month would not adequately match expenses with revenues generated from its use. For example, if a large copying machine is leased by a company for a period of 12 months, the company benefits from its use over the full-time period. Hence its liability for the other party and asset for usĪccording to the GAAP (Generally Accepted Accounting Principles), the expense should be recorded in the same accounting period as the benefit generated from the related asset. Pre Paid expenses are always shown in the asset side, because the other party who we have paid in advance is liable to provide us the service in the future. The most common examples of prepaid expenses are prepaid rent and prepaid insurance. The value of prepaid expense is expensed over time onto the balance sheet. Prepaid expenses are expenditures in one accounting period, and they will not be recognized until a later accounting period.
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. Effect of Prepaid Expenses on financial statements.We will simplify this in this simple article with examples While checking or analysing financial statements, we always do find the word pre paid following by either rent, expense or insurance.