Posted in Operations and Supply Chain Terms, Total Reads: 226
Definition: Prepaid Expenses
Prepaid expenses are the expenses of future that have already been paid in advance. These are recorded in the balance sheet on the asset side. These are the costs that have been incurred but not yet expired or not yet used. These arise due to the payments by the businesses for the goods and services that are to be received in the future.
These are firstly recorded in the balance sheet as assets and then their value is slowly expensed over time as the services or goods are received onto the income statement as unlike the conventional expenses, the benefit of prepaid expanses is received over a time.
The prepaid expenses are needed to be paid due to the nature of certain assets. For example the insurance cover premiums. These premiums are needed to be paid from time to time as no company will wait for something wrong to happen and then start taking money from you as monthly installments. So proactive insurance policy needed to be taken and hence by nature, insurance is always a prepaid expense.
Example: if a company takes the insurance policy of 1 year and pays $1200 as the premium then it is a prepaid expense. Now it will be expensed from the income statement at $100 per month until the value of prepaid expanses is fully utilized at the end of the year.