What Are Prepaid Expenses - Definition - Meaning- Examples - Explanation

Prepaid Expenses mean those Expenses which are paid by the business in advance but the benefits  or services still not received by the business. The benefit / services will be received later on. Most of the Prepayments are Prepaid Expenses. Other name for Prepaid Expenses are Unexpired Expenses or Expenses paid in advance. Prepaid Expenses are also known as Deferred Expenses under Accrual Basis of Accounting. Examples are Prepaid Rent, Prepaid Fees, Prepaid Internet Bills, etc.

Prepaid Expenses are categorized under Current Assets and shown on the Balance Sheet unless it is fully expired or utilized.

Prepaid Expenses Journal Entry

Example: Let say, we paid Advance Rent to rental company for 3 Month of Rs. 30000 (each month Rs. 10000). Now we need to record following Entry for Prepaid Rent:

                                             Prepaid Expenses a/c   30000

                                                                              Cash a/c   30000

(Paid Rent In Advance)

When after three months, when we have received the rent facility from rental company i.e., Housing Facility, Car Facility, etc, then we need to close Prepaid Rent account and transfer it to Rent Expense Account and record the following Adjusting Entry as shown below:

                                               Rent Expense a/c   30000

                                                                         Prepaid Rent a/c   30000

(Prepaid Rent Now Expired)

 

Prepaid Expense T Account or Ledger is prepared to record Journal Entries related to it. When it incurs, we debit it and when we received it or when portion of it is received by us, then we credit it by passing Reversing Entry in order to cancel its effect.

Is Prepaid Expense An Asset (Current Asset)?

Yes, it is a Current Asset and categories under Assets on Balance Sheet as the expenditures are paid or expenses paid in advance but against which the benefit or services are still not received by the company during the accounting period.

Is Prepaid Expenses Current Or Noncurrent?

If Prepaid Expenses are paid within one accounting year, then these are known as current assets simply called as "current" but if these are paid for more than one year, then these are treated as non current Assets or "noncurrent".