Prepaid Expense Adjusting Entry Examples, Sample, Illustration, Calculation Help Online
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Meaning of Prepaid Expense
Sometimes, benefit of the expense incurred in one accounting period is available in the next accounting year also. Such part of the expense is called Prepaid Expense. Examples of such expense are unexpired insurance, interest paid in advance etc. prepaid expense is carried forward to the next year so that correct profit of the year is determined. Prepaid Expense is shown in the Balance Sheet as current assets. The adjusting entry for prepaid expense is
Prepaid Expense a/c Dr.
To Expense a/c
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Prepaid Expense Entry Example Explanation
The above adjusting entry can be well demonstrated with the help of an example.
Example: insurance premium of $4000 is paid on 1st July 2014 and the accounts are to be closed on 31st March 2015. The benefit of insurance will accrue up to 30th June 2015. In other words, insurance benefit for three months i.e. 1st April to 30th June 2015 will be derived in the next accounting year. Therefore, 1/4th of the premium should be charged to the profit and loss account for the next year. The accounting entry to be passed is
Prepaid Insurance Premium a/c Dr. $1000
To Insurance Premium a/c $1000
1. Unexpired part of insurance premium i.e. 1000 is deducted from the insurance premium in P/L account.
2. Prepaid Insurance Premium is shown in assets side of the Balance Sheet.
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