Nature of prepaid expenses Prepaid expenses are expenses paid for in advance and recorded as assets before they are used or consumed. A. If six months worth of insurance is paid in advance, the company is entitled to insurance (a service) for the next six months in the future. Like accounts receivable, prepaid expenses are assets because they are a claim to assets. O Prepaid accounts are another name for accounts receivable and are reported as an asset. In small business, there are a number of purchases you may make that are considered prepaid expenses. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Understand Difficulty: Easy Learning Objective: 05-04 Explain the purposes of closing entries; prepare these entries. Generally, this is an Other Current Asset account. They are an advance payment for the business and therefore treated as an asset.The accounting rule applied is to debit the increase in assets” and “credit the decrease in expense” (modern rules of accounting). In this case one asset (pre paid rent) has been increased by 3,000 and the other (cash) has been reduced by a similar amount. 1. Publisher: OpenStax College. Accounting and legal fees. Cash: ... Prepaid expenses: Prepaids are any expense the business pays for in advance, such as rent, insurance, office supplies, postage, travel expense, or advances to employees. Importance Saving : One good example is rent, where the company paid for the next 12 months in advance. Prepaid expenses are shown in the assets section on the balance sheet. Tangible assets are physical items such as building, machinery, inventories, receivables, cash, prepaid expenses and advance payments to other parties. A business has an annual premises rent of 60,000 and pays the landlord quarterly in advance on the first day of each quarter. Which of the following is an example of a prepaid expense? This represents the part of the expense that applies to 2019 and 2020. Examples of prepaid expenses can be insurance premiums or rent. Equipment D. Prepaid Rent 27. The debits and credits are shown in the following journal entry: Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Which of the following accounts is not considered a current asset? You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired. A. For this transaction the Accounting equation is shown in the following table. 2. Interest Revenue B. Prepaid Insurance C. Insurance Expense D. Supplies Expense. Inventory – Inventory consists of goods owned a company that is in the business of selling those goods. The following list shows common prepaid expenses examples: Rent (paying for a commercial space before using it) Small business insurance policies So, a prepaid account will always be represented on the balance sheet as an asset or a liability. D. Earned Revenue. Which of the following accounts is not considered a current liability? Expenses are considered ... (an asset) is recorded when the amount is paid. Examples of Prepaid Expenses. The amount paid is often recorded in the current asset account Prepaid Insurance. Select one: Unearned Fees Supplies Accounts Receivable Unearned subscriptions The type of account and normal balance of Accumulated Depreciation is Select one: contra asset, debit asset, debit contra asset, credit asset, credit If you paid $600 for a three‑year service contract for office equipment in 2019, you can deduct $400 in 2019. A manufacturer would record an expense when it pays its employees for producing its products. A prepaid expense is an expense you pay ahead of time. a) cash, fees earned, unearned revenues b) prepaid expenses, unearned revenues, fees earned c) capital account, drawing account, income summary d) drawing account, fees earned, rent expense If you use the accrual method of accounting, claim any expense you prepay in the year or years in which you receive the related benefit. What is considered a prepaid expense? Welcome to Sciemce, where you can ask questions and receive answers from other members of the community. Expense accounts are considered contra equity accounts because their balance decreases the overall equity balance. C) Capital Stock, Dividends, Income Summary. Individuals and businesses alike can accrue prepaid expenses. 19th Edition. In some cases, part or all of the expense accounts simply are listed in alphabetical order. A. Prepaid Rent Journal Entry. Prepaid rent is a balance sheet account, and rent expense is an income statement account. The profit or as deductions from the total revenue. OpenStax. A prepaid expense is an expense which has been paid in advance. The second entry requires expense accounts close to the Income Summary account. Intangible assets normally include non-physical items and rights. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. A) Cash, Retained Earnings, Wages Payable . O Prepaid accounts are current expense accounts and are reported on the income statement. Which of the following accounts is considered a permanent or real account? It has a prepaid expense of 15,000. Examples of intangible assets include goodwill, trademarks, copyrights, patent rights and brand recognition etc. The balance in the Prepaid Expenses account should be zero at the end of the coverage period. Expenses are recognized when they are incurred regardless of when paid. A common prepaid expense is the six-month insurance premium that is paid in advance for insurance coverage on a company's vehicles. 3. useful in simplifying the recording of transactions in the next accounting period. Which of the following accounts will be closed to Income Summary? Two methods to account for prepaid expenses: balance sheet approach and income statement approach. Find Find arrow_forward. A. Prepaid Expenses. If the user has multiple prepaid expenses to track, it is suggested that they create sub-accounts of the Prepaid Expenses account in order to track each separately. Find Find arrow_forward. Principles of Accounting Volume 1. This preview shows page 5 - 7 out of 9 pages.. 26. Single rent payment show a credit to expenses and Deferred Charges expenditure as a expense, Miscellaneous expense a. Entry requires expense accounts and are reported as an asset on the income Summary shows 5! 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