Examples of Prepaid Expenses
The following prepaid expense entry example outlines the most common prepaid expense. It is impossible to provide a complete set of examples that address every variation in every situation since there are thousands of such expenses. Prepaid ExpensePrepaid ExpensePrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.read more is future expenses that have been paid in advance. The most common examples of Prepaid expenses include Rent; Equipment paid for before use, Salaries, Taxes, utility bills, Interest expenses, etc.
Most Common Prepaid Expense Examples
Prepaid expenses refer to the payment made for the expenses that will happen in the future. E.g., salaries and taxes paid in advance, paying Rent before using any space for commercial purposes, any premiums for insurance of business, any interest/installment to be paid on using any hired equipment, any utility bills, etc.
Example #1
Suppose Company A has purchased Consulting Services from another Company B and makes the payment for the Fees for the same of 1 lac per year for the next 5 Years.
In this case, Company A will show 1 Lac as a yearly expense, and four lacs would be shown in the Asset side of AccountingAsset Side Of AccountingAssets in accounting refer to the organization’s resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company’s worth and are recorded in the balance sheet.read more as “ Prepaid Expense,” which subsequently be recorded as expenditure every year for the next 4 Years.
So the Journal Entry for the same will be –
Example #2
Suppose Company A pays Rent to the landlord of the Building on 31.12.2018 for the next 1 Year till 31.12.2019. The Company Follows the Financial Year of Accounting. The rental paid is 100,000 per month.
The Entire Money paid as Rent to the landlord will not be considered Expenses for FY 18-19. Instead, only Rent for the three months, i.e., Jan 19-Mar 19, will be booked as Expenses, and the remaining nine months of Rent will be shown as Prepaid Expenses under the head Other Current AssetsCurrent AssetsOther current assets refer to the category of assets which record all the uncommon and insignificant assets readily convertible into cash and doesn’t fit in any common current assets categories like cash & cash equivalents, inventory, trade receivables, etc.read more on the Asset Side of the Balance Sheet.
Journal Entries
For FY 18-19
For FY 19-20
Example #3
Suppose Company A pays Advance Salary to Mr. B for meeting his medical expenses for the next six months on 31.3.2019. Salary of Mr. B = 50,000 per month.
In this case, If Company A prepares his Annual Financial Statement as of 31st March 2019, they will record 50,000*6= 300,000 as Advance Salary paid to Mr. B under the heading “ Prepaid Expenses.” Therefore, they will be reflected under Other Current Assets in the Balance SheetCurrent Assets In The Balance SheetCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more.
Journal Entries in A’s Books in FY 18-19
In FY 19-20
Example #4
Suppose Mr. A pays his Bike Insurance policy amount for two years to avail of the appropriate discount. Insurance Amt = 6,000 per year. Insurance is paid on 31.01.2019. Period of Insurance = 31.01.2019 to 31.01.2021.
In this case, Mr. A will record the two months payment as Insurance Exp for FY 18-19. The balance amount would be recorded as Prepaid Exp under Other Current Assets, which will be utilized in the next 2 Financial Years, respectively.
Journal Entries in FY 18-19
Journal Entries in FY 19-20
Journal Entries in FY 20-21
There will not be any balance in Prepaid Exp A/c since the Same has been fully utilized in the 2Years period.
Example #5
Telephone Expenses paid in Office Premises. Bill for the period 25-03-2019 to 24-04-2019
Since the Bill period goes into another month, in FY 18-19, only 7 Days of expenditure would be considered Telephone Expenses. The balance will be recorded as Prepaid Exp for April 2019. Bill amount 30,000
Journal Entries:
Example #6
Tax Liability of the Company via Advance Tax. The Projected Tax Liability of the Company is 1,00,000, and the same is paid in quarterly installments to the Income Tax authorities. After the Year-end, the Company assesses the Final Tax Liability based on the Profits earned during the year. As a result, the Final tax Liability comes out to be 1,20,000.
In this case, the quarterly estimated Tax paid by companies is as per the Projections and is made in advance of the Actual Tax Liability. Such Expenses are recorded as Advance Tax Paid under the Subhead Prepaid Expenses under Other Current Assets in the Balance Sheet and are adjusted when the Final Tax Liability is ascertained. Advance Tax amt = 1,00,000. Final Tax Liability 1,20,000Advance Tax paid will be reflected in the Asset side of the Balance Sheet while preparing the monthly and Quarterly Financials. However, the same will be adjusted while determining the Final Tax Liability of the Company since part portion has already been paid.Journal Entries while paying Advance Tax
Journal Entries while paying Final Tax
Conclusion
Hence a Prepaid Expenditure is an expense-paid in one Accounting Year, but the same benefits are consumed more than once in the Accounting Year. Only Expenses that are due and incurred in one accounting year can be debited to Profit & Loss A/c. Rest all the payments made which relate to the future should be grouped under Prepaid Expenses in the Balance Sheet.
Recommended Articles
This has been a guide to Prepaid Expense Examples. Here we discuss the most common Prepaid Expense examples and step-by-step explanation. You can learn more about accounting from the following articles –
- Deferred ExpensesWarranty ExpensePrepaid Insurance DefinitionExpense Accounting
