The basic accounting for a prepaid expense follows these steps: If a prepaid expense were likely to not be consumed within the next year, it would instead be classified on the balance sheet as a long-term asset (a rarity). The reason for the current asset designation is that most prepaid assets are consumed within a few months of their initial recordation. Another item commonly found in the prepaid expenses account is prepaid rent.Ī prepaid expense is carried on the balance sheet of an organization as a current asset until it is consumed. Examples of Prepaid ExpensesĪn example of a prepaid expense is insurance, which is frequently paid in advance for multiple future periods an entity initially records this expenditure as a prepaid expense (an asset), and then charges it to expense over the usage period. The prepaids concept is not used under the cash basis of accounting, which is commonly used by smaller organizations. If a business were to not use the prepaids concept, their assets would be somewhat understated in the short term, as would their profits. If consumed over multiple periods, there may be a series of corresponding charges to expense.Įxpenditures are recorded as prepaid expenses in order to more closely match their recognition as expenses with the periods in which they are actually consumed. ![]() ![]() When the asset is eventually consumed, it is charged to expense. A prepaid expense is an expenditure paid for in one accounting period, but for which the underlying asset will not be consumed until a future period.
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