Prepaid expenses are those expenses which have been paid in advance. In other words, these are the expenses which have been paid during the accounting period for which the final accounts are being prepared but they relate to the next period. As the benefit of such expenses are received in the subsequent years, it will be treated as expenses of the coming years and not the year in which it is paid.
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Examples: Insurance premium has been paid in advance. Rent has been paid for the next year.
Treatment of prepaid expenses in final account:
ADVERTISEMENTS:
If prepaid expenses are given in the trial balance they are recorded in the assets side of Balance sheet only. But if they are given in the adjustments they are subtracted from concerned expenses in the debit side of profit and loss account and again are shown in the assets side of Balance Sheet.