What is a prepaid expense? A prepaid expense is an expenditure, or payment, that has been made but has not been recorded yet because the services have not been rendered – or the payment has been made for service over a period of time, and should be expensed over that same period of time. An example of a prepaid expense is insurance. Until services are rendered, these expenses should be considered assets because of the value that they hold.
Types of Prepaid Expenses
Insurance isn’t the only prepaid expense your business is likely paying. Here are a few common prepaid expenses in business accounting:
- Some utilities
- Employee Salaries
- Bulk Supplies
- Legal Retainer
- Estimated taxes
Since you’ve paid these expenses in advance, you should accurately track these assets in your balance sheet. Doing this requires that you list each asset and the amount you paid for them in your assets. As the services are rendered, you will then add the amounts to your expenses and remove them from your assets. An example of this would be rent. If your rent is $10,000 monthly, but you are required to pay the full yearly amount in advance, your assets at the beginning of the year would reflect $120,000 for rent, and decrease each month by $10,000, which is your rent amount. This same process would apply for any expense that you’ve paid for an extended period in advance.
Find a Solution That Fits
Prepaid expenses can be complicated to track, especially if you have multiple expenses to manage of varying values. Taking from the assets column and adding to the expenses column monthly can be daunting if you are doing these tasks manually. The easiest way to manage complicated prepaid expenses is to invest in a solution that can easily manage and track these prepaid expenses for you automatically. These solutions automatically store the schedule for these expenses and update your expenses and assets automatically, so you no longer have to do the extra work.