Outstanding and Prepaid Expenses - Class XI

Prepaid insurance is an asset because it represents a payment made for a future service. Assets have a debit balance in accounting.

There are several items of expense which are paid in advance in the normal course of business operations. At the end of the accounting period, it is found that the benefits of such expense are not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense, is carried forward to the next year and is termed as prepaid expenses. The necessary adjustment in respect of prepaid expenses is:

The necessary adjustment in respect of prepaid expenses is made by recording the following entry:

There are several items of expense which are paid in advance in normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense, is carried forward to the next year and is termed as prepaid expenses. The necessary adjustment in respect of prepaid expenses is made by recording the following entry:

 Deferred revenue is common with subscription-based products or services that require prepayments. Examples of unearned revenue are rent payments received in advance, prepayment received for newspaper subscriptions, annual prepayment received for the use of software, and prepaid insurance.

Accrual system of Accounting is also known as the mercantile system of accounting wherein the transactions are recognized and recorded as and when they take place. 

A trial balance is the accounting equation of our business laid out in detail. It has our assets, expenses and drawings on the left (the debit side) and our liabilities, revenue and owner's equity on the right (the credit side)

A prepaid expense refers to an amount that a company has paid and a portion or all of it will be an expense in a later accounting period.

Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired.

Amount of Prepaid expense for year ending 30th june ,2018 

Generally, the amount of prepaid expenses that will be used up within one year are reported on a company's balance sheet as a current asset. As the amount expires, the current asset is reduced and the amount of the reduction is reported as an expense on the income statement.

When expenses are paid they are deducted. However, because of the general rule regarding prepaid expenses, simply prepaying an expense does not make it immediately deductible (barring an exception due to the 12-month rule).

Under the accrual method of accounting, income that is received in advance is a liability because the company that received the money has not yet earned it and it has an obligation (a liability) to deliver the related goods or services in the future.

Prepaid rent is an asset because it is a payment for future benefits. Therefore, it is shown on the asset side of the balance sheet.

Subscription fees prepaid is a current asset as its benefit will be received within a period of one year. 

To record the expiration of prepaid insurance, you must reduce the asset (Prepaid Insurance) and recognize the expense (Insurance Expense). Therefore, you credit Prepaid Insurance for the amount that expired (1,200).

If a prepaid expense appears in the trial balance, it has already been adjusted or recorded as an asset. It is shown on the asset side of the balance sheet.

A current asset which indicates the cost of the insurance contract (premiums) that have been paid in advance. It represents the amount that has been paid but has not yet expired as of the balance sheet date. A related account is Insurance Expense, which appears on the income statement and shown on balance sheet as asset.

To adjust for prepaid expenses, you deduct the prepaid portion from the total expense in the Profit and Loss account and show the prepaid amount as an asset on the balance sheet.

The adjusting entry to record a prepaid expense involves debiting the Prepaid Expenses account (to create the asset) and crediting the Expenses account (to reduce the expense).

Prepaid expenses represent costs paid in advance for services or goods not yet received. On the balance sheet, they are recorded at their original cost minus the portion that has already expired or been consumed.

The Profit and Loss account should reflect only the expenses related to the current period. Since the total premium is 1,000 and 300 is prepaid (an asset), the expense to be recognized is 1,000 - 300 = 700.

An unexpired expense (prepaid expense) is an asset on the balance sheet. When adjusting, it is removed from the expense account in the profit and loss statement, effectively reducing the expense for the period.

Prepaid expenses are payments made in the current period for benefits that will be received in a future or following financial year.

Prepaid expenses are deducted from the respective accounts in trading and P & L A/c and shown in asset side in the balance sheet.