In other words, he is paying for these benefits in advance of when he is actually going to use them. When Bill makes his premium payment, he is actually paying for six months worth of insurance. At the end of the six-month period, the policy is renewed and Bill pays $600 for another six-month period. ![]() Let’s take a look at an insurance example.Īssume that Bill’s Retail Store pays its liability insurance premiums every six months. ![]() The most common examples of prepaid costs are reoccurring monthly bills like rent, utilities, and insurance. When the assets are used, they are recorded as expenses. Instead, these expenses are recorded as assets on the balance sheet because they are future resources that will be received in another accounting period. Since the matching principles requires that all expenses be matched with the revenues they help generate, prepaid expenses are not recorded as expenses when they are purchased. In accounting, prepaid expense is a current asset that occurs as a result of advance payment that we have made for goods or services that we will receive in the near future. In other words, it’s a resource that is paid for in advance of actually receiving the resource. Pre-paid expenses are intangible assets a company has already paid for and expects to benefit from in the short term. If you have any questions please contact Financial Services at 6-3524.Definition: A prepaid expense is the prepayment of services before they are received. If a company decides to pay for a product or service in advance, the upfront payment is recorded as a Prepaid Expense in the current assets section of the balance sheet. Some prepaid expenses, such as airfare for travel, may be initiated outside of your department.Ĭommon prepaid expense account codes: Account Code A prepaid expense is any expense you pay that has not yet been incurred. Prepaid Expenses Definition in Accounting. To review prepaid expense account codes or any other general ledger accounts, use FGITBAL/FGIGLAC. ![]() *** It is important that beginning balances in prepaid expense accounts are reversed prior to year-end. To remove the prepaid and recognize the expense in a future period or fiscal year:ĭebit Department Index Expense Account CodeĬredit Department Index Prepaid Expense Account Code For a list of 1099 tax reportable account codes, please see the following website: UO Fiscal Policy Manual.įor amounts of $5,000 or greater posted as expense that should be prepaid expenses for future periods or fiscal years:ĭebit Department Index Prepaid Expense Account CodeĬredit Department Index Expense Account Code Tax reportable expenses must first be coded to an expense account code when processing an invoice. Purchases of less than $5,000 are not amortized over future fiscal years they are expensed in the current fiscal year. This journal voucher may be processed ahead of time if the future period is open. ![]() To remove the prepaid and recognize the expense, post a reversing journal voucher with a transaction date in the fiscal year and period that the goods or services are to be provided. Invoices and other purchases, such as Concur or Duck Depot transactions, for $5,000 or more for goods or services that will be received (partially or entirely) in a future fiscal year should be allocated to the appropriate prepaid expense account code. According to Generally Accepted Accounting Principles (GAAP), accrual accounting requires expenditures to be charged to the fiscal year and period in which goods are received or services are performed, regardless of when budget or cash is available.
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