How to record a prepaid expense
A cost paid before the year end but used after it is carried forward. Work out the prepayment and write its journal.
In this room: 2 tasks, 7 questions
- Working out the prepayment3 questions
- The journal for a prepayment4 questions
A prepaid expense is a cost paid before the year end that will be used after it. It is taken out of this year's expense and carried forward.
The joinery's insurance account shows £3,760 paid in the year. Of that, £2,400 was paid on 1 September for a new policy that runs for 12 months, to 31 August.
The months from 1 January to 31 August have been paid for, but the cover has not yet been used.
Answer the questions below
2 more questions follow in this task.
The adjustment takes the unused cost out of the expense account and records it as something the business still has.
- Debit Prepaid expenses: an asset, because the business has paid for cover it has not used yet
- Credit the expense account: the cost for the year goes down, so profit goes up
Prepaid expenses is shown under current assets in the statement of financial position.
Answer the questions below
3 more questions follow in this task.