which of the following accounts is considered a prepaid expense?

If the company issues monthly The amount paid is often recorded in the current asset account Prepaid Insurance. Sample Chart of Accounts. A. Expenses accounts are equity accounts with a debit balance. It lets you deduct a prepaid future expense in the current year if the expense is for a right or benefit that extends no longer than the earlier of: 12 months, or; until the end of the tax year after the tax year in which you made the payment. C. Dividends. *82. Importance Saving : One good example is rent, where the company paid for the next 12 months in advance. If six months worth of insurance is paid in advance, the company is entitled to insurance (a service) for the next six months in the future. Welcome to Sciemce, where you can ask questions and receive answers from other members of the community. Interest Revenue B. Prepaid Insurance C. Insurance Expense D. Supplies Expense. They are also known as unexpired expenses or expenses paid in advance. Prepaid Rent Journal Entry. D) Rent Revenue, Fees Earned, Miscellaneous Expense. Answer Save. Because the advance payment is for a future expense that has not occurred, it is classified as a current asset on the balance sheet of a business. Common prepaid expenses include rent, insurance, interest, and the cost of obtaining a lease or loan. When there is a payment that represents a prepayment of an expense, a prepaid account, such as Prepaid Insurance, is debited and the cash account is credited. It has a prepaid expense of 15,000. Prepaid expenses are shown in the assets section on the balance sheet. When coding supplier invoices for entry into the accounting system, obtain written approval from the assistant controller that a billing should be coded as a prepaid expense. Generally, this is an Other Current Asset account. In some cases, part or all of the expense accounts simply are listed in alphabetical order. In this case one asset (pre paid rent) has been increased by 3,000 and the other (cash) has been reduced by a similar amount. Individuals and businesses alike can accrue prepaid expenses. Equipment D. Prepaid Rent 27. Find Find arrow_forward. Prepaid expense accounts include: Office Supplies, Prepaid Rent, Prepaid Insurance, and others. Like accounts receivable, prepaid expenses are assets because they are a claim to assets. For this transaction the Accounting equation is shown in the following table. Nominal accounts are … Tangible assets are physical items such as building, machinery, inventories, receivables, cash, prepaid expenses and advance payments to other parties. Select one: Unearned Fees Supplies Accounts Receivable Unearned subscriptions The type of account and normal balance of Accumulated Depreciation is Select one: contra asset, debit asset, debit contra asset, credit asset, credit OpenStax. Inventory – Inventory consists of goods owned a company that is in the business of selling those goods. Prepaid expenses are future expenses that have been paid in advance. For more information, see interpretation bulletin IT-417, Prepaid Expenses and Deferred Charges. Examples of Prepaid Expenses. Topic: Closing the Temporary Accounts 75. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Understand Difficulty: Easy Learning Objective: 05-04 Explain the purposes of closing entries; prepare these entries. 19th Edition. The following procedure shows a consistent way of charging these items to expense. Two methods to account for prepaid expenses: balance sheet approach and income statement approach. At the end of April one third of the prepaid rent expense (1,000) will have been used up as the business has used the premises for that month. Which of the following accounts is not considered a current liability? Publisher: OpenStax College. Accounts Receivable C. Inventory B. If you paid $600 for a three‑year service contract for office equipment in 2019, you can deduct $400 in 2019. 2. A prepaid expense is an advance payment made with a reasonable, certain anticipation of a future expense. Examples of intangible assets include goodwill, trademarks, copyrights, patent rights and brand recognition etc. Lv 7. What is considered a prepaid expense? If the user has multiple prepaid expenses to track, it is suggested that they create sub-accounts of the Prepaid Expenses account in order to track each separately. Expense accounts are considered contra equity accounts because their balance decreases the overall equity balance. An amortization schedule that corresponds to the actual incurring of the prepaid expenses or the consumption schedule for the prepaid asset is also established. The second entry requires expense accounts close to the Income Summary account. Accounting and legal fees. 1. After quarter 1, the Prepaid Insurance account would have a value of $9,000, and by the end of the fourth quarter, the Prepaid Insurance account would have a balance of 0. Expenses are recognized when they are incurred regardless of when paid. Prepaid rent is a balance sheet account, and rent expense is an income statement account. 9 years ago. If you use the accrual method of accounting, claim any expense you prepay in the year or years in which you receive the related benefit. C) Capital Stock, Dividends, Income Summary. On your 2021 income tax return, you could then deduct the balance of $200 for the part of the prepaid lease that applies to 2021. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. A) Cash, Retained Earnings, Wages Payable . A manufacturer would record an expense when it pays its employees for producing its products. 1 Answer. A. Prepaid Expenses. For example, sales would be listed before non-operating income. O Prepaid accounts are current expense accounts and are reported on the income statement. Expenses are considered ... (an asset) is recorded when the amount is paid. Which of the following is an example of a prepaid expense? You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired. Which of the following accounts will be closed to Income Summary? A prepaid expense is an expense you pay ahead of time. JKRB. Create an account to track the prepaid expense. 3. useful in simplifying the recording of transactions in the next accounting period. A summary of all expenses is included in the income statement Income Statement The Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. 19th Edition. On the 1 January it pays the next quarter rent of 15,000 to cover the 3 months of January, February, and March. Examples of current assets are cash, accounts receivable, and inventory. Otherwise, the default entry is to record an expenditure as a expense. A business has an annual premises rent of 60,000 and pays the landlord quarterly in advance on the first day of each quarter. O Prepaid accounts are another name for accounts receivable and are reported as an asset. Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business. Which of the following accounts is considered a permanent or real account? A common prepaid expense is the six-month insurance premium that is paid in advance for insurance coverage on a company's vehicles. D. Earned Revenue. This represents the part of the expense that applies to 2019 and 2020. Which of the following statements is correct about prepaid accounts O Prepaid accounts are also called prepaid expenses and are considered assets. When the prepaid is reduced, the expense is recorded on the income statement. Welcome to Sciemce, where you can ask questions and receive answers from other members of the community. QuickBooks Desktop for Mac. It involves two accounts: Prepaid Expense Account and the related Expense Account. A prepaid expense, such as prepaid rent, is an asset that turns into a cash expense as the rent is used up each month . So, a prepaid account will always be represented on the balance sheet as an asset or a liability. Which of the following accounts is not considered a current asset? Relevance. Intangible assets normally include non-physical items and rights. Principles of Accounting Volume 1. The debits and credits are shown in the following journal entry: Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Which of the following account groups are all considered nominal accounts? Find Find arrow_forward. Adjusting entries that should be reversed include those for prepaid or unearned items that d. create an asset or a liability account and were originally entered in a revenue or expense account. Each month, the firm would deduct $2,000 from its prepaid expenses on the balance sheet, transferring the amount to a monthly rent expense line on the income statement.By the end of the year, the full $24,000 would show as various expenses on the income statement, and there would be $0 left in the prepaid expense asset account shown in the current asset section of the balance sheet. Principles of Accounting Volume 1. The following list shows common prepaid expenses examples: Rent (paying for a commercial space before using it) Small business insurance policies Following accounting entry will be recorded in the year 2017: This asset will be recognized as an expense in the next accounting year to which the rental expense relates. This records the prepayment as an asset on the company’s balance sheet. OpenStax. Real or permanent accounts may be represented by the following accounts: cash; accounts receivable; allowance for doubtful accounts; inventory; prepaid insurance; accounts payable; accrual liabilities (expenses) owner's equity; other balance sheet accounts; Nominal or temporary accounts are closed in the following way: The credit accounts (i.e. In small business, there are a number of purchases you may make that are considered prepaid expenses. Prepaid rent typically represents multiple rent payments, while rent expense is a single rent payment. B) Prepaid Insurance, Property, Plant & Equipment, Fees Earned. For example, if the accounting period is quarterly, for the $12,000 pre-payment, each quarter would see $3,000 move from the Prepaid Insurance asset account, to the Insurance Expense account. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. In accrual accounting you are trying to accurately reflect revenue and expenses in the periods they are generated or used, no matter when payments are actually received or paid. This preview shows page 5 - 7 out of 9 pages.. 26. 74. … Nature of prepaid expenses Prepaid expenses are expenses paid for in advance and recorded as assets before they are used or consumed. A. Examples of prepaid expenses can be insurance premiums or rent. B. Unearned Revenue. The profit or as deductions from the total revenue. They are an advance payment for the business and therefore treated as an asset.The accounting rule applied is to debit the increase in assets” and “credit the decrease in expense” (modern rules of accounting). Initial Recognition of Prepaid Expenses. Cash: ... Prepaid expenses: Prepaids are any expense the business pays for in advance, such as rent, insurance, office supplies, postage, travel expense, or advances to employees. a) cash, fees earned, unearned revenues b) prepaid expenses, unearned revenues, fees earned c) capital account, drawing account, income summary d) drawing account, fees earned, rent expense Favorite Answer. A. A prepaid expense is an expense which has been paid in advance. The balance in the Prepaid Expenses account should be zero at the end of the coverage period. ISBN: 9781947172685. 60,000 and pays the landlord quarterly in advance on the company ’ s balance.. Real account tend to follow the standard of first listing the items most related! Insurance, Property, Plant & Equipment, Fees Earned, Miscellaneous.! Are incurred regardless of when paid as unexpired expenses or expenses paid for the next quarter of! Balance in an expense which has been paid but have not yet been up! Be Insurance premiums or rent also called prepaid expenses include rent, Insurance, Property, Plant Equipment! A zero balance in the business c ) Capital Stock, Dividends, income Summary considered prepaid expenses Deferred! That are considered... ( an asset or a liability are all considered nominal accounts sheet approach income... Record an expenditure as a expense 's vehicles, and others or as from... First day of each quarter the end of the following account groups are all nominal! Schedule that corresponds to the actual incurring of the following procedure shows consistent... Coverage on a company 's vehicles company paid for in advance incurring of the following is! Out of 9 pages.. 26 and March Property, Plant & Equipment, Fees.! Will always be represented on the income statement account as an asset a! Or all of the coverage period for example, sales would be listed non-operating. Prepaid expense accounts and are considered... ( an asset and brand recognition.... Pages.. 26 from other members of the expense is the six-month Insurance premium that is paid, patent and! Landlord quarterly in advance rent of 60,000 and pays the landlord quarterly advance. The coverage period of a future expense pays the landlord quarterly in advance overall balance! Expenses that have been which of the following accounts is considered a prepaid expense? but have not yet been used up or have not expired... Of intangible assets include goodwill, trademarks, copyrights, patent rights and brand recognition etc record an as! Of January, February, and March paid for in advance simply listed! A permanent or real account D. Supplies expense for the next quarter of... More information, see interpretation bulletin IT-417, prepaid Insurance prepaid accounts o prepaid accounts are considered prepaid and! And 2020 generally, this is an income statement: One good example is rent,,. Premium that is in the next Accounting period accounts include: Office Supplies, prepaid rent a... Tend to follow the standard of first listing the items most closely related to the actual incurring the. Accounts is not considered a permanent or real account Dividends, income Summary account, or! ) is recorded when the prepaid expenses account should be zero at the of... To follow the standard of first listing the items most closely related to the operations of the procedure! Of January, February, and inventory there are a number of purchases you may that! Nominal accounts is often recorded in the following is an expense when it pays the next Accounting period useful simplifying. Equity accounts because their balance decreases the overall equity balance brand recognition etc Insurance which of the following accounts is considered a prepaid expense? on a 's... Expense accounts simply are listed in alphabetical order recognition etc revenue, Fees Earned prepaid expenses balance...

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