AdvertisementsĬurrent assets include cash, inventory, debtors, prepaid expenses. Prepaid expense as Current asset:Ĭurrent assets are assets that can be readily converted into cash within a year or a working capital cycle. Such expenses are shown on the asset side of balance sheet under Current Assets heading. The journal entry required to record the prepaid expense is: AdvertisementsĪt the time of payment: Particulars Dr Cr Prepaid Expense A/C Dr x,xxx To Cash/ Bank A/C x,xxxĪdjustment entry: Particulars Dr Cr Expense A/C Dr x,xxx To Prepaid Expense A/C x,xxx

Either cash is credited or bank account is credited with prepaid expense. Prepaid expense is an asset and are increased when debited. Related article What are Other Current Liabilities? How Do You Account For It? Journal Entry of Prepaid Expense: (Expense charge being created and prepaid expense reduced) Step2: Payments of prepaid expenses Advertisements (Proforma invoice being received and payment to be made) Steps involved in journal entry of prepaid expenses: Since these expenses would bring in profits in the future, they are charged against profits of the company. The utilization of prepaid expenses happens by charging proportionate amounts to expense accounts. The value of asset is then changed with actual expense recognized in the income statement. As we use, the value of asset usually decreases. They turn into expenses when we actually use them. They arise in accrual-based accounting only. They don’t provide right at instant time rather in a future course of time. They accrue when we pay for something that we will receive in the near future. Prepaid expenses are expenses which haven’t been made yet due but paid in advance. They are prepayments made by the company. They are initially recorded as assets and as they become due, they are reduced from the expenses balance as per matching concept. They haven’t been recorded by the company as an expense, but have been paid in advance. This may be due to some discount being offered or longer subscription or validity being offered. Sometimes the companies pay for the expenses in advance before the expenses become due.

Prepaid expenses on balance sheet