About Prepaid Expenses

What are Prepaid Expenses?

Prepaid expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid for in advance. In other words, prepaid expenses are expenditures paid for in one accounting period, but that will not be recognized until a later accounting period. Prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time when the benefits are realized (the matching principle).

Common Reasons for Prepaid Expenses

The two most common uses of prepaid expenses are rent and insurance.

1. Prepaid rent is rent paid in advance of the rental period. The journal entries for prepaid rent are as follows:

Initial journal entry for prepaid rent:

Dr     Prepaid Rent                10000

Cr      to Cash                                             10000

Adjusting journal entry as the prepaid rent expires:

Dr     Rent Expenses             10000

Cr      to Prepaid Rent                              10000

2- Prepaid insurance is insurance paid in advance and that has not yet expired on the date of the balance sheet. 

Initial journal entry for prepaid insurance:

Dr     Prepaid Insurance                10000

Cr      to Cash                                             10000

Adjusting journal entry as the prepaid insurance expires:

Dr     Insurance Expenses             10000

Cr      to Prepaid Insurance                              10000

The End