The benefit of some of the expenses already spent will be available in the next accounting year also. Such a portion of the expense is called pre-paid expense; since such expenses are already paid, they are also recorded in the books of accounts of that period to which they do not relate. The result shown by the final accounts of a particular period will not be correct because such expenses relate to future periods.
Therefore, such prepaid expenses must be adjusted in the books of accounts to arrive at true profit. Generally insurance, taxes, telephone subscriptions, rent etc. are paid in advance, thus requiring adjustment – e.g. Rent paid by x for one year on 1.7.79 when his accounting year is calendar year; thus rent for 6 months will remain unexhausted and will be carried to the next year.