This recognition of expenses is done through adjusting entries. In simpler terms, prepaid expenses are assets that turn into expenses as their value drops. That’s why prepaid expenses are first recorded as assets in the balance sheet.Īs the asset value starts to decrease, the prepaid expense is removed from the balance sheet and expensed in the income statement. That’s a fair assumption, but as we mentioned, expenses are not recognized when you pay for them, but when they get used. You may be thinking: a prepaid expense is an expense account, right? It’s in the name! What Type of Account is a Prepaid Expense? These payments in advance can be for equipment, supplies, rent, insurance, and anything else the business pays for before using it. An accounting period can be a month, a quarter, or a full fiscal year. So, prepaid expenses are payments for purchases that will be consumed throughout two or more accounting periods. On the accrual basis of accounting, expenses get recognized when they are used, consumed, utilized, or have expired, not when they get made. Automate Prepaid Expenses with Accounting SoftwareĪ prepaid expense (also known as prepayment) is a payment made in advance for an expense that hasn’t occurred yet.īut what does it mean for an expense to occur?. Read on for an in-depth look at the following topics: This guide has the information you’re looking for and provides examples suited for small businesses. In the accounting cycle, these advance payments are recorded as prepaid expenses.Īre prepaid expenses an asset or expense account? How do I record a prepaid expense in my accounting books? When managing a business, you have to pay for some assets in advance, such as rent or insurance.
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