Towards the bottom, you’ll see a ‘Choose file’ button next to the Receipt row. Thank you for reading CFI’s guide to Prepaid Expenses.Did you know how easy TimeSolv makes tracking expenses and billing your clients accurately? By being able to attach pictures of expense receipts to a matter, you can provide proof of expenses as part of the billing process.Ĭlick on Expense>Expense Entry. The expense would show up on the income statement while the decrease in prepaid rent of $10,000 would reduce the assets on the balance sheet by $10,000. The adjusting entry on January 31 would result in an expense of $10,000 (rent expense) and a decrease in assets of $10,000 (prepaid rent). Refer to the first example of prepaid rent. The adjusting journal entry for a prepaid expense, however, does affect both a company’s income statement and balance sheet. Recall that prepaid expenses are considered an asset because they provide future economic benefits to the company. These are both asset accounts and do not increase or decrease a company’s balance sheet. The initial journal entry for prepaid rent is a debit to prepaid rent and a credit to cash. For example, refer to the first example of prepaid rent. The initial journal entry for a prepaid expense does not affect a company’s financial statements.
Effect of Prepaid Expenses on Financial Statements The adjusting journal entry is done each month, and at the end of the year, when the insurance policy has no future economic benefits, the prepaid insurance balance would be 0.
Note: One month corresponds to $2,000 ($24,000 x 1/12) in insurance policy. Therefore, prepaid insurance must be adjusted: The company pays $24,000 in cash upfront for a 12-month insurance policy for the warehouse.Īt the end of one month, Company A would have used up one month of its insurance policy. Upon signing the one-year lease agreement for the warehouse, the company also purchases insurance for the warehouse. The adjusting journal entry is done each month, and at the end of the year, when the lease agreement has no future economic benefits, the prepaid rent balance would be 0. Therefore, prepaid rent must be adjusted: The initial journal entry for Company A would be as follows:Īt the end of one month, Company A would’ve used up one month of its lease agreement. The landlord requires that Company A pays the annual amount ($120,000) upfront at the beginning of the year. We will look at two examples of prepaid expenses: Example #1Ĭompany A signs a one-year lease on a warehouse for $10,000 a month. Initial journal entry for prepaid insurance:Īdjusting journal entry as the prepaid insurance expires: Prepaid insurance is insurance paid in advance and that has not yet expired on the date of the balance sheet. The journal entries for prepaid rent are as follows:Īdjusting journal entry as the prepaid rent expires:Ģ. Prepaid rent is rent paid in advance of the rental period. The two most common uses of prepaid expenses are rent and insurance.ġ.
As the benefits of the expenses are recognized, the related asset account is decreased and expensed.Prepaid expenses are future expenses that are paid in advance and hence recognized initially as an asset.