How to Record Prepaid Expenses

[Suba]

In business, we are often required to pay for goods or services that have not yet been used, but must be paid in advance. These include store rent due three years in advance, domain and hosting rentals for five years, insurance due for one year, software subscription fees already paid for one year, and so on.

All costs classified as prepaid expenses are recorded as assets on the balance sheet and are only recognized as expenses when the benefits have been received/consumed. For example, if we rent a store for $3,600 for three years, starting in January 2025 and ending in December 2027, the prepaid rent for the store will be recorded as an asset on the balance sheet at $3,600 at the beginning of the transaction. At the end of the accounting period, December 31, 2025, it will be recorded in the income statement as a rent expense of $1,200 for one year. In the new cycle, or at the beginning of January 2026, the prepaid rent will have decreased by $1,200, or will be recorded on the balance sheet at $2,400.

 

[gwolf666]

Prepaid expenses are payments you make before using a good or service, and they are recorded as an asset because they haven't yet been consumed. As time goes by and those goods or services are used, those payments become expenses on the income statement, depending on the benefit received.

 

[Augusta]

Yes, I agree with you as the benefit of the service or product is used up over time, you make an adjusting journal entry by debiting the corresponding Expense account