![]() This transaction does not cause an increase or decrease on the business’s balance sheet since both of these accounts are asset accounts. To record the initial journal entry, prepaid rent is debited, and cash is credited. Impact of Prepaid Expenses on Financial StatementsĪ business’s financial statements are not affected by the initial journal entry it makes for a prepaid expense.Īn example of this would be prepaid insurance. The corresponding journal entry would look like this: DateĪt the end of one year, all of the economic benefits of the insurance policy will have been consumed, and no balance will remain in the prepaid insurance account. This would be $3,000 found by taking the $36,000 of the policy and dividing it by the twelve months of the policy. In order to account for the prepaid insurance policy, Johnny would make the following initial journal entry: Dateįollowing this, Johnny’s Mattress Emporium would record an adjusting entry to account for the amount of the policy that it has used. Example #2Īfter opening its retail location, Johnny’s Mattress Emporium also needs commercial renters insurance to protect its assets.įor its insurance policy, it pays $36,000 in cash or a one-year policy. This adjusting entry would be repeated every month throughout the course of the leasing agreement.Īfter the year passes, the lease agreement will hold no more economic benefits, and the balance of the entire prepaid rent account will have been expensed. The resulting journal entry would look like this: Date In order to account for this, the following initial journal entry would be made: DateĪt the end of every month, Johnny’s Mattress Emporium would make an adjusting entry to account for the amount of the leasing agreement it has used.īecause the leasing agreement is for one year, the adjusting entry can be found by dividing the $240,000 by 12 months which will leave us with a $20,000 adjusting entry every month. The agreement requires Johnny to pay the full amount for the year upfront, which is $240,000. Johnny’s Mattress Emporium signed a one-year leasing agreement for its retail location. Let’s look at a couple of examples of prepaid expenses. In order to account for this, the following journal entries would be made.Īs time passes and the policy is gradually used, the following adjusting entry would be made. Until the policy expires, this would be listed on the balance sheet as an asset. ![]() Insurance policies are often paid in advance for an entire period, and this is prepaid insurance. These adjusting entries would be made until the entire prepaid account has been expensed. In order to account for this, a business would make the following journal entries.Īs the rent is used, the following adjusting journal entry would be made: Date ![]() When a business pays to rent a space in advance of the period in which it is used, this is called prepaid rent. The two single most common types of prepaid expenses are rent and insurance. The Most Common Types of Prepaid Expenses These prepaid expenses will be listed on the balance sheet as an asset and will gradually be expensed over time as its economic future benefits are realized. ![]() This type of asset results from a business making advance payments for either goods or services in one accounting period, which will be received in a later accounting period. Prepaid expenses are a form of asset that is listed on the balance sheet. ![]()
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