A prepaid expense / cost is expenditure on goods and services that have been paid, but that will not be used / consumed during the period. Payment can be seen as an advance payment for goods and services. When goods or services are not used / consumed, not the cost be included in the current period, but must be addressed during the period when they will be used / consumed.
Cost of goods / services that are not used / consumed in the current period must be deferred and recognized as expenses in the period in which it will be used / consumed.
A prepaid expense / prepaid expenses also called for an interim receivable / accrued receivables, which is an umbrella term for prepaid expenses and accrued income. Interim Loans are included in the account group 17. Read more on interim claims. Another common name is an interim entry / accruals, which also includes interim debt.
One of the most common Prepaid expenses is when companies pay their rents, this is usually done in advance and quarterly. When payment is made in advance so there is no possibility to use / consume the premises during the time the payment relates, but the period is in the future.
When this happens it can be said that the company has a claim (interim claim) on the landlord and the landlord has an obligation to the company (Interim liability). Tenant book up the prepaid rent as a prepaid expense, while the landlord book it as deferred revenue.
In the preparation of financial statements (whether it is the monthly total, semi-annual financial statements or annual financial statements) so you adjust for those deferred costs. These get the assets on the balance sheet.
The most common prepaid expenses:
– rents
– Insurance
– lease payments
– annual pass
– subscription costs
– subscriptions
ACCOUNTING EXAMPLE:
Insurance