The difference between prepaid expense and accrued expense is as follows: Then in the accounting year, when an expense is utilised, the prepaid expense account will be credited, and the actual account to which such expense relates is debited. So basically, in the accounting year, when they are paid, one current asset (prepaid expense) increases (debited), and other current assets (cash/bank) decrease (credited). Such prepaid expense is the company’s current asset. The prepaid expenses are first recorded as prepaid expenses in the accounting year when they are paid because they cannot be recorded as revenue. So prepaid expense account is created to record the payment of expense in that accounting period in which it is paid but not yet become due. The prepaid expenses are recognized because the expenses are booked in the books of accounts when they become due regardless of actual cash payment (matching principle). (Entry to record prepaid expense as expense in the next accounting year) (Entry to record expense which is paid in advance)Īdjustment entry when the expense is realized in the coming accounting period is: Date The journal entry for the prepaid expense is Date The prepaid expense account at first seems to be an expense, but actually, it is recorded as a current asset in the balance sheet of the company, and over the time, the amount is charged to the income statement whenever it gets realized. What Kind of Account Is Prepaid Expenses?
(Entry to record prepaid expense as Insurance expense) (Entry to record prepaid expense as rent) (Entry to record prepaid expense and expense in the income statement)Īdjusting entry in the next accounting year: Date Therefore, $500($2000/12*3) is booked as an expense in the same accounting year, and the remaining $1,500 ($2,000-$500) will be recorded as a prepaid expense. Still, the remaining premium relates to the next accounting year. The remaining $3,000 is related to the next accounting period, so the same will be recorded as prepaid insurance, and in case of the insurance premium paid, 3 months insurance premium is the expense of the same accounting period. So the rent paid amounting to $3,000 is for 6 months that will relate to the accounting year ending on March 2020 and therefore will be recorded as an expense in the same year. But the accounting period followed by techno incorporation will end on 31 st March 2020. Solution: In the above case, the Rent is paid on October 1 st, 2019, for the period starting from 1 st October 2019 to 30 th September 2020. How the prepaid expenses will be dealt with?
So the accounting period followed by techno incorporation is April to march. Also, the insurance premium of $2,000 is paid on 1 st January 2020 for the plant and machinery insurance for one year starting from 1 st January 2020. But initially, the landlord demanded rent of 12 months on 1 st October 2019 only.
For this, he has taken a factory on Rent where the rent is $500 per month. Rhino started a company named techno incorporation which deals with laptops and related accessories, on 1st October 2019.
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