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EXPENSE DEFINITION HOW TO
EXPENSE DEFINITION SOFTWARE

Hence, this is why a financial automation solution is of such great use because you wouldn’t want to forget about a record related to a prepaid expense because it could end up messing up your books. This topic can be confusing, so if you’re still wondering, “What is a prepaid expense” then understanding how it is defined as a credit and debit over time and on the books could help clear things up.Ī prepaid expense is recorded as a credit and a debit, but it is all based on the accounting period and timing. At the end of the asset’s life span, it will zero out (and you won’t have to worry about having made any human errors or having forgotten about a prepaid expense).

EXPENSE DEFINITION SOFTWARE

At the end of all the payments, then the account reflecting the asset should be at $0.Īs you can see, if you have multiple prepaid expenses, then this process could easily become overwhelming to keep track of and maintain properly.Ī financial automation software solution can do the work for you so that you can ensure nothing slips through the cracks.

You rinse and repeat until the prepaid asset has been fully realised.

So, you subtract the period’s cost from the asset account, add the same amount to the cash account, and this will reduce the balance of the prepaid account, making it an expense.

When each accounting period comes to a close and your company has recognised the benefit of the prepaid expense, then you must expense that portion on the income statement.

At first, debit the asset in the account for the paid amount and then subtract that same amount from the cash account (the accounts are balanced, so nothing is affected here because the credit and debit column cancel each other out).

Enter the payment total in the related asset account.

Here’s how these prepaid expenses look when they get recorded: Here’s a look at some prepaid expenses examples: Depending on your line of business, you may have some or several. There are several different examples of prepaid expenses. At each time that a portion of the expense is allocated, then it’s also deducted from the total cost that was first denoted in the asset account.Īgain, the purpose of these prepaid expenses is so that the company’s financial statements are accurately reflected when the cost of the expense is providing the related benefit (so everything will be balanced). When the benefits are realized over time for such assets, then they get recorded as an expense in each related accounting period on the income statement. They transform into an expense during a later accounting period (when the asset gets used for its value). Prepaid expenses begin on the balance sheet as an asset.Įven though the cost of the asset (expense) has been made already, it isn’t yet an expense in the financial records.

EXPENSE DEFINITION HOW TO

To exemplify, the generally accepted accounting principles (GAAP) notes that expenses are to be recorded in the same accounting period as when the asset delivers its benefits.įor certain expenses, this is the case, so there has to be a process related to how to properly record them in the company’s books.

The reason that prepaid expenses exist is because of accounting methods. What is the Purpose of a Prepaid Expense?