A Crash Course on Prepaid Expenses: What You Should Know

Expenses are inevitable when running a business. Regardless of what products or services exactly your business sells, it will incur expenses. While all expenses are operational costs, there are different types of expenses, such as prepaid expenses.

Overview of Prepaid Expenses

Prepaid expenses are business-related expenses that are paid for in advance. If you pay for goods or services to use in your business’s operations but don’t receive those goods or services until a later date, you should record them as prepaid expenses. They are “prepaid” in the sense that you pay for them before you receive them.

Common examples of prepaid expenses include the following:

  • Rent or lease payments
  • Insurance
  • Utilities
  • Interest

How to Record Prepaid Expenses

How do you record prepaid expenses? Because they are paid for in advance, you’ll typically need to record them as current assets, followed by expenses. You can record them in a prepaid asset account on your business’s balance sheet. You can then reduce these asset accounts by making entries to expense accounts.

Unlike other expenses, prepaid expenses are recorded as current assets — at least initially. This is due to the fact that they are paid for in advance. Prepaid expenses involve business-related goods or services that are paid for in advance. You won’t receive them immediately when you pay for them. It make several days, weeks or even months until you receive them. And because they are paid for in advance, prepaid expenses are recorded as current assets. After the prepaid expenses have been realized, they are later recorded as expenses.

Prepaid vs Accrued Expenses

In addition to prepaid expenses, there are accrued expenses. Both prepaid and accrued expenses are business-related expenses, but don’t let that fool you into thinking they are the same. Prepaid and accrued are two different types of expenses.

Accrued expenses are essentially the opposite of their prepaid counterparts. Prepaid expenses involve paying for goods or services in advance, whereas accrued expenses involve paying for goods or services after you receive them.

In Conclusion

There are many different types of expenses. Prepaid expenses are expenses that are paid for in advance. Most rent and lease payments are considered prepaid expenses. If you rent or lease real property for your business, you’ll have to make those payments in advance. Therefore, they are considered prepaid expenses.

Have anything else that you’d like to add? Let us know in the comments section below!

Related Post



Please read our documentation file to know how to change colors as you want