Prepaid Expense
What is a Prepaid Expense?
A prepaid expense is an expense you have paid in advance but is set aside as a current asset until it is used.
![pe1](https://seeaccountingnow.online/wp-content/uploads/2021/06/pe1.jpg)
How it Works
Most of a business’s expenses will be used during the current accounting period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe2.jpg)
However, some expenses may be need to be paid in advance.
![pe3](https://seeaccountingnow.online/wp-content/uploads/2021/06/pe3.jpg)
This means the expense will be paid at some point during the current period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe4-1.jpg)
But only a portion of it will be used by period-end.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe5.jpg)
The remaining portion won’t be used until the coming period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe6.jpg)
For your period-end report to be correct, it should not show the whole payment.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe7.jpg)
Instead, it should show expense used during the current period, only.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe8.jpg)
So, at period-end, you need to adjust your accounts.
![pe9](https://seeaccountingnow.online/wp-content/uploads/2021/06/pe9.jpg)
Recording a Prepayment
(Using Balance Sheet Method)
When the expense is first paid, you show that money came from the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe10.jpg)
Then you record the payment in the prepaid expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe11.jpg)
To do this, you credit the checking account.
![pe12](https://seeaccountingnow.online/wp-content/uploads/2021/06/pe12.jpg)
This shows money came from the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe13.jpg)
After that, you debit the prepaid expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe14.jpg)
This shows you have allocated the full value of the advance payment to the prepaid account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe15.jpg)
The prepaid expense account is an asset account.
![pe16](https://seeaccountingnow.online/wp-content/uploads/2021/06/pe16.jpg)
Until used , the prepaid money still belongs to the business.
![pe17](https://seeaccountingnow.online/wp-content/uploads/2021/06/pe17.jpg)
During the period, a portion of the prepaid expense will be used.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe18.jpg)
Here, you have t calculate the amount of prepaid expense used.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe19.jpg)
Once calculated, you take that value from the prepaid expense account.
![pe20](https://seeaccountingnow.online/wp-content/uploads/2021/06/pe20.jpg)
Then you record the amount in the appropriate expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe21.jpg)
To record the transaction, you credit the prepaid expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe22.jpg)
This shows you have taken a portion of the value from the prepaid expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe23.jpg)
After this, you debit the appropriate expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe24.jpg)
This shows the portion of the prepayment has been used for that particular expense.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/pe25.jpg)
© R.J. Hickman 2020