Which Of The Following Statements Is Correct About Prepaid Expenses?

In this multiple choice question, the true statement about “Prepaid Expenses (PE)” is option (B), as PE are also called prepaid accounts and are considered as Current Assets to be shown on the assets side of balance sheet. Prepaid means payment made in advance against which the services not yet received. For example, if the prepaid phone card is purchased then the payment is made in advance but the phone card is still not used i.e., no phone call is made so no benefit is received during the period. As the probable benefits will be received in near future so it is considered as Current Asset from the points view of the business. Other examples of PE include Prepaid Rent, Salary, etc. PE are also known as unexpired assets as these are not consumed and their benefits are not yet enjoyed by the business during the current accounting period.

The option (B) is incorrect choice as PE are not prepaid liabilities and categorized as liabilities.

The option (C) is also wrong choice here as PE are not Accounts Receivable. PE are not receivables i.e., the amount of due to be received from customers for goods sold or services rendered on account, but the probable benefits to be received in near future from the utilization of prepaid asset.

The option (D) is also wrong choice here as PE are not current expense accounts which are recorded in the Income Statement for the period. The difference between prepaid expenses and Expenses is that in PE the benefits will be received in near future but the payment is paid in advance so it is treated as unexpired asset while in expenses, the benefits will be received immediately and the payment is made later on such as electricity expense, rent expense, etc., where benefit be enjoyed immediately but the payment is made later on.