prepaid expenses

Deferred Charge

An asset on a balance sheet that comes about from a business making payment for a good or service it has not yet received, but will in the near future. Prepaid expenses are expensed over time as the goods or services are received. A common example of a prepaid expense is an insurance policy. Another example is a lump sum payment for rent; if a company pays for a year's worth of rent in advance, it is recorded as a deferred charge. A deferred charge is also called a prepaid expense.

prepaid expenses

Expenses that represent goods or services delivered over a period of time,but which are paid in a lump sum at the beginning of that time period.If one paid $12,000 for an insurance premium on property for one year,that $12,000 would be entered on the accounting records as a $12,000 asset called prepaid insurance expense.Each month the property owner would reduce the asset account by $1,000 and show a corresponding $1,000 expense for that month for insurance. At the end of the year,the prepaid expense account would be $0 and the books and records would show $12,000 worth of total insurance expenses.When conducting the due diligence to purchase an income-producing property,the potential buyer should inquire about the handling of expenses for which the seller receives bills only a few times a year.Sometimes,such expenses never show up on the monthly profit and loss statements, but are artificially placed in something called the thirteenth month accounting period.

Prepaid Expenses

Prepaid expenses are expenses that are paid in advance. Cash-basis as well as accrual-basis taxpayers usually are required to capitalize prepayments for rent, insurance, etc. that cover more than one year. Deductions are taken for the period during which the benefits are received.