Prepaid expenses are those expenses which have been paid in advance and related benefits are not consumed within the accounting period. The benefits of expenses incurred are carried to the next accounting period. Examples include prepaid salary, prepaid rent etc. Prepaid expenses are recorded in the books at the end of an accounting period to show true numbers of a business.
Prepaid (Unexpired) expense is a personal account and is shown on the Assets side of a balance sheet.
Expenses are amounts paid for goods or services purchased. According to the accrual concept of accounting, transactions are recorded in the books of accounts at the time of their occurrence and not when the actual cash or a cash equivalent is received or paid. Therefore, payments are not necessarily made immediately, they may be late or in advance. Outstanding expenses and prepaid expenses are both a result of this.
Journal Entry for Prepaid Expenses
|Prepaid Expense A/C||Debit|
|To Expense A/C||Credit|
Lite© – Learning Initiative Through Example(s)
Let’s assume that in March there were 10,000 paid in advance for salaries, which are due in the following month of April. At the end of March the company will record this in their books of accounts with the following journal entry:
|Prepaid Salaries A/C||10,000|
|To Salaries A/C||10,000|
>Read Outstanding Expenses