Prepaid Expenses

Prepaid expenses belong on the balance sheet and(Depending on method of payment)
can encompass costs such as rent, insurance,Each month a general journal entry would be made
advertising, and any other cost that normally would beexpensing one month's premium cost. This entry would
expensed on your income statement but is paid inbe as follows:
advance of the period in which it is owed. PrepaidDebit: Insurance Premium Expense $(1/12 of yearly
expenses differ from deposits as they will be used uppremium)
within a specific period (usually within a year) as aCredit Prepaid Insurance Expense $(1/12 of yearly
deposit could be carried until the end of a contractpremium)
when ever that might be. For example, prepaid rentHandling prepaid expenses in this way assures you
would be an upfront prepayment of the yearly rent,are following the rule of matching revenue with
but a rental deposit would be tied in with certainexpense. You can see if you were on a calendar
contract obligations and not be an actual expense untilfiscal year ending December 31st, and your insurance
the end of the contract.premium was due on November 1st to expense the
Should you, for example, pay for your yearly insuranceentire premium in November would be inappropriate.
premium in one lump sum then you would charge thisAlthough, an insurance premium is the most common
premium to an account called Prepaid Insurance. Theprepaid expense, there are several others that you
entry would be:might come across. Anytime you pay an expense, no
Debit: Prepaid Insurance Expense $(amount of yearlymatter what type, that will have a timing effect on
premium)your books; you should consider using a Prepaid
Credit Accounts Payable or Cash $(amount of yearlyExpense account on your balance sheet for that
premium)expense.