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Prepaid expenses refer to the advance payment of goods or services the benefits of which shall be received in the future. Expenses such as prepaid rent, insurance, etc. are shown in the trial balance on the debit side as they are initially an asset for the business, however, once the benefit is received, the value of the asset falls. I would like to explain this further with the help of an example which is as follows,
The trial balance of ABC Ltd. shows the rent amounting to 4,500 as a prepayment for April.
This prepaid rent of 4,500 is shown in the trial balance as follows:
Trial Balance as of 31st March, yyyy
|Plant & Machinery||40,000|
- If the prepaid expenses are already shown in the trial balance it means that an adjusting entry has already been recorded in the books of accounts and they shall be further recorded only in the balance sheet of the company.
- It shall be shown in the balance sheet of the company under current assets.
- However, if prepaid expenses are not shown in the Trial Balance, then they shall be added to their respective accounts and recorded on the debit side in the Profit and Loss A/c.
Hope this helps.
>Related Long Quiz for Practice Quiz 36 – Prepaid Expenses