Journal Entry for Prepaid Expenses

Such expenses which are concerned with the next financial year but have been paid in the current year are called prepaid expenses. Prepaid expense journal entry is recorded by debiting the particular expense and crediting cash. Prepaid Expenses are also known as Unexpired or Advance Expenses.

Prepaid Expenses Journal Entry 

Example 1: Out of the rent paid this year, $5,000 is related to next year.

Solution:

Example 2: Interest paid in advance $500.

Solution:

Prepaid Expenses – FAQs

What is a prepaid expense?

A prepaid expense is a cost paid in advance but not yet incurred, such as insurance or rent.

How do you record a prepaid expense?

Record a prepaid expense by debiting the prepaid expense account and crediting the cash or bank account.

What is the journal entry for recognizing prepaid expenses as expenses?

To recognize prepaid expenses as expenses, debit the expense account and credit the prepaid expense account.

What happens to prepaid expenses over time?

Prepaid expenses decrease over time as they are gradually expensed, reducing the prepaid expense account and increasing the corresponding expense account.

How do prepaid expenses affect financial statements?

Prepaid expenses initially increase assets on the balance sheet and decrease expenses on the income statement, but they eventually decrease assets and increase expenses as they are expensed over time.