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.

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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.

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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.