![]() ![]() At first, debit the asset in the account for the paid amount and then subtract that same amount from the cash account (the accounts are balanced, so nothing is affected here because the credit and debit column cancel each other out).Enter the payment total in the related asset account.Here’s how these prepaid expenses look when they get recorded: Here’s a look at some prepaid expenses examples: Depending on your line of business, you may have some or several. There are several different examples of prepaid expenses. ![]() At each time that a portion of the expense is allocated, then it’s also deducted from the total cost that was first denoted in the asset account.Īgain, the purpose of these prepaid expenses is so that the company’s financial statements are accurately reflected when the cost of the expense is providing the related benefit (so everything will be balanced). When the benefits are realized over time for such assets, then they get recorded as an expense in each related accounting period on the income statement. They transform into an expense during a later accounting period (when the asset gets used for its value). Prepaid expenses begin on the balance sheet as an asset.Įven though the cost of the asset (expense) has been made already, it isn’t yet an expense in the financial records. ![]() To exemplify, the generally accepted accounting principles (GAAP) notes that expenses are to be recorded in the same accounting period as when the asset delivers its benefits.įor certain expenses, this is the case, so there has to be a process related to how to properly record them in the company’s books. The reason that prepaid expenses exist is because of accounting methods. What is the Purpose of a Prepaid Expense? ![]()
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