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Prepaid expenses usually provide value to a company over an extended period of time, such as insurance or prepaid rent. Many types of business insurance are paid as a lump sum in advance of a specific coverage period. Similarly, when a business signs a prepaid expenses rental agreement with a landlord, it may include a stipulation to prepay a certain number of months’ rent upfront. Some of the common examples of prepaid expenses are monthly, quarterly, half-yearly, or yearly payments made toward a product or service.
Is prepaid expense an asset on the balance sheet?
Prepaid expenses are recorded as an asset on a business's balance sheet because they signify a future benefit that is due to the company. Prepaid expenses are amounts paid in advance by a business in exchange for goods or services to be delivered in the future.
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How Are Prepaid Expenses Recorded in a Company’s Financial Statements?
Current assets include accounts receivable, inventory, cash, and cash equivalents, etc. If there is any product or service that you cannot afford to miss, then it is better that you pay in advance. For example, the rent you pay for your office building is a prepaid expense.
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The Advantages and Drawbacks of Having Prepaid Expenses
According to accounting principles, prepaid expenses should not be included in your income statement. This follows the rules of accrual account, which states that you must report revenue and expenses at the same time as they are incurred, regardless of when you actually make or receive payments for these. Organizations typically use a prepaid expense ledger to monitor the total https://www.bookstime.com/articles/the-accounting-equation-may-be-expressed-as amount of money spent on prepayments, when payments are due, and when they will be received. This helps ensure that companies are accurately accounting for their assets while also staying up-to-date with any upcoming liabilities. It includes insurance, rent, subscription, and utility bill payments. Prepaid expenses offer tax benefits as well as help you hedge against inflation.
