Prepaid Expenses Accounting

Prepaid Expenses Accounting

Prepayment or prepaid Expenses are those expenses which are paid in advance prepaid expenses. Thus prepaid expenses are treated as asset (benefit will be consumed in next year).

Following are some important examples

a)   prepaid insurance

b)  prepaid Rent

 Prepaid Expenses Journal Entry 1st Year:

Method 1

In this method prepaid portion is calculated at the time of initial recording of expenses.

Date	Particulars	Dr	Cr
	Rent  A/c	20,000
	Prepaid Rent	10,000
	Cash		10,000

   Method 2

In this method initially expenses are recorded at full amount, and that the end of year, the prepaid portion is separated. Thus two entries are passed one at the time of payment and other at the year end.

Date	Particulars	Dr	Cr
	Rent  A/c	30,000
	Cash A/c		30,000

Date	Particulars	Dr	Cr
	Rent prepaid A/c	10,000
	Rent A/c		10,000

 Next Year

 Rent prepaid will be reversed next year i.e. rent charged as expenses and rent prepaid is reduced by that amount.

Date	Particulars	Dr	Cr
	Rent A/c	10,000
	Rent prepaid A/c		10,000