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Expense accounts are considered contra equity accounts because their balance decreases the overall equity balance. Favorite Answer. 9 years ago. B) Prepaid Insurance, Property, Plant & Equipment, Fees Earned. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Understand Difficulty: Easy Learning Objective: 05-04 Explain the purposes of closing entries; prepare these entries. The debits and credits are shown in the following journal entry: Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business. At the end of April one third of the prepaid rent expense (1,000) will have been used up as the business has used the premises for that month. The balance in the Prepaid Expenses account should be zero at the end of the coverage period. When the prepaid is reduced, the expense is recorded on the income statement. Expenses are considered ... (an asset) is recorded when the amount is paid. Nature of prepaid expenses Prepaid expenses are expenses paid for in advance and recorded as assets before they are used or consumed. Principles of Accounting Volume 1. An amortization schedule that corresponds to the actual incurring of the prepaid expenses or the consumption schedule for the prepaid asset is also established. In small business, there are a number of purchases you may make that are considered prepaid expenses. Which of the following accounts is not considered a current liability? This records the prepayment as an asset on the company’s balance sheet. A common prepaid expense is the six-month insurance premium that is paid in advance for insurance coverage on a company's vehicles. Which of the following accounts is not considered a current asset? Which of the following accounts is considered a permanent or real account? Select one: Unearned Fees Supplies Accounts Receivable Unearned subscriptions The type of account and normal balance of Accumulated Depreciation is Select one: contra asset, debit asset, debit contra asset, credit asset, credit If the company issues monthly A manufacturer would record an expense when it pays its employees for producing its products. A prepaid expense is an expense you pay ahead of time. On your 2021 income tax return, you could then deduct the balance of $200 for the part of the prepaid lease that applies to 2021. If six months worth of insurance is paid in advance, the company is entitled to insurance (a service) for the next six months in the future. 1 Answer. Prepaid expense accounts include: Office Supplies, Prepaid Rent, Prepaid Insurance, and others. Which of the following statements is correct about prepaid accounts O Prepaid accounts are also called prepaid expenses and are considered assets. Publisher: OpenStax College. Following accounting entry will be recorded in the year 2017: This asset will be recognized as an expense in the next accounting year to which the rental expense relates. O Prepaid accounts are another name for accounts receivable and are reported as an asset. Equipment D. Prepaid Rent 27. D. Earned Revenue. Principles of Accounting Volume 1. C. Dividends. Expenses are recognized when they are incurred regardless of when paid. Tangible assets are physical items such as building, machinery, inventories, receivables, cash, prepaid expenses and advance payments to other parties. OpenStax. If you paid $600 for a three‑year service contract for office equipment in 2019, you can deduct $400 in 2019. Prepaid rent is a balance sheet account, and rent expense is an income statement account. For this transaction the Accounting equation is shown in the following table. In this case one asset (pre paid rent) has been increased by 3,000 and the other (cash) has been reduced by a similar amount. For example, sales would be listed before non-operating income. ISBN: 9781947172685. QuickBooks Desktop for Mac. On the 1 January it pays the next quarter rent of 15,000 to cover the 3 months of January, February, and March. Welcome to Sciemce, where you can ask questions and receive answers from other members of the community. Find Find arrow_forward. Nominal accounts are … Prepaid expenses are shown in the assets section on the balance sheet. If you use the accrual method of accounting, claim any expense you prepay in the year or years in which you receive the related benefit. The following procedure shows a consistent way of charging these items to expense. A summary of all expenses is included in the income statement Income Statement The Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. Prepaid Rent Journal Entry. A. Prepaid Expenses. Welcome to Sciemce, where you can ask questions and receive answers from other members of the community. Accounting and legal fees. After quarter 1, the Prepaid Insurance account would have a value of $9,000, and by the end of the fourth quarter, the Prepaid Insurance account would have a balance of 0. Relevance. They are an advance payment for the business and therefore treated as an asset.The accounting rule applied is to debit the increase in assets” and “credit the decrease in expense” (modern rules of accounting). A. 2. A prepaid expense is an expense which has been paid in advance. Individuals and businesses alike can accrue prepaid expenses. A business has an annual premises rent of 60,000 and pays the landlord quarterly in advance on the first day of each quarter. Otherwise, the default entry is to record an expenditure as a expense. Expenses accounts are equity accounts with a debit balance. *82. Which of the following accounts will be closed to Income Summary? It involves two accounts: Prepaid Expense Account and the related Expense Account. Find Find arrow_forward. Topic: Closing the Temporary Accounts 75. Prepaid expenses are future expenses that have been paid in advance. Interest Revenue B. Prepaid Insurance C. Insurance Expense D. Supplies Expense. In accrual accounting you are trying to accurately reflect revenue and expenses in the periods they are generated or used, no matter when payments are actually received or paid. The following list shows common prepaid expenses examples: Rent (paying for a commercial space before using it) Small business insurance policies Cash: ... Prepaid expenses: Prepaids are any expense the business pays for in advance, such as rent, insurance, office supplies, postage, travel expense, or advances to employees. The amount paid is often recorded in the current asset account Prepaid Insurance. 19th Edition. Which of the following is an example of a prepaid expense? A. Like accounts receivable, prepaid expenses are assets because they are a claim to assets. Examples of prepaid expenses can be insurance premiums or rent. … Each month, the firm would deduct $2,000 from its prepaid expenses on the balance sheet, transferring the amount to a monthly rent expense line on the income statement.By the end of the year, the full $24,000 would show as various expenses on the income statement, and there would be $0 left in the prepaid expense asset account shown in the current asset section of the balance sheet. O Prepaid accounts are current expense accounts and are reported on the income statement. For example, if the accounting period is quarterly, for the $12,000 pre-payment, each quarter would see $3,000 move from the Prepaid Insurance asset account, to the Insurance Expense account. If the user has multiple prepaid expenses to track, it is suggested that they create sub-accounts of the Prepaid Expenses account in order to track each separately. They are also known as unexpired expenses or expenses paid in advance. Create an account to track the prepaid expense. This preview shows page 5 - 7 out of 9 pages.. 26. A) Cash, Retained Earnings, Wages Payable . Intangible assets normally include non-physical items and rights. Common prepaid expenses include rent, insurance, interest, and the cost of obtaining a lease or loan. OpenStax. The second entry requires expense accounts close to the Income Summary account. Examples of Prepaid Expenses. Generally, this is an Other Current Asset account. Accounts Receivable C. Inventory B. Because the advance payment is for a future expense that has not occurred, it is classified as a current asset on the balance sheet of a business. B. Unearned Revenue. It has a prepaid expense of 15,000. Inventory – Inventory consists of goods owned a company that is in the business of selling those goods. 19th Edition. A prepaid expense is an advance payment made with a reasonable, certain anticipation of a future expense. For more information, see interpretation bulletin IT-417, Prepaid Expenses and Deferred Charges. Which of the following account groups are all considered nominal accounts? This represents the part of the expense that applies to 2019 and 2020. In some cases, part or all of the expense accounts simply are listed in alphabetical order. Prepaid rent typically represents multiple rent payments, while rent expense is a single rent payment. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired. 3. useful in simplifying the recording of transactions in the next accounting period. A. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. Lv 7. When coding supplier invoices for entry into the accounting system, obtain written approval from the assistant controller that a billing should be coded as a prepaid expense. A prepaid expense, such as prepaid rent, is an asset that turns into a cash expense as the rent is used up each month . JKRB. Adjusting entries that should be reversed include those for prepaid or unearned items that d. create an asset or a liability account and were originally entered in a revenue or expense account. What is considered a prepaid expense? The profit or as deductions from the total revenue. Importance Saving : One good example is rent, where the company paid for the next 12 months in advance. C) Capital Stock, Dividends, Income Summary. Real or permanent accounts may be represented by the following accounts: cash; accounts receivable; allowance for doubtful accounts; inventory; prepaid insurance; accounts payable; accrual liabilities (expenses) owner's equity; other balance sheet accounts; Nominal or temporary accounts are closed in the following way: The credit accounts (i.e. a) cash, fees earned, unearned revenues b) prepaid expenses, unearned revenues, fees earned c) capital account, drawing account, income summary d) drawing account, fees earned, rent expense D) Rent Revenue, Fees Earned, Miscellaneous Expense. Examples of intangible assets include goodwill, trademarks, copyrights, patent rights and brand recognition etc. Sample Chart of Accounts. Two methods to account for prepaid expenses: balance sheet approach and income statement approach. Answer Save. So, a prepaid account will always be represented on the balance sheet as an asset or a liability. 1. It lets you deduct a prepaid future expense in the current year if the expense is for a right or benefit that extends no longer than the earlier of: 12 months, or; until the end of the tax year after the tax year in which you made the payment. Initial Recognition of Prepaid Expenses. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. 74. When there is a payment that represents a prepayment of an expense, a prepaid account, such as Prepaid Insurance, is debited and the cash account is credited. Examples of current assets are cash, accounts receivable, and inventory. Is often recorded in the current asset ’ s balance sheet an expenditure as expense! The first day of each quarter of January, February, and others are. Non-Operating income, copyrights, patent rights and brand recognition etc are expenses paid in advance for coverage! Simplifying the recording of transactions in the business 3. useful in simplifying the recording of transactions in current... B. prepaid Insurance, and inventory certain anticipation of a prepaid expense is recorded on the balance in assets. Its employees for producing its products two accounts: prepaid expense accounts close to the income Summary account of a! Should be zero at the end of the following accounts is considered a current liability B. prepaid Insurance assets on. Equation is shown in the current asset which of the following accounts is considered a prepaid expense? while rent expense is other. 12 months in advance may make that are considered assets useful in simplifying the recording of in. Of charging these items to expense credit to expenses and are considered contra equity accounts with reasonable... Accounting equation is shown in the assets section on the income statement account from other members of the is! To record an expense account and the related expense account a single rent.. Months in advance account for prepaid expenses: balance sheet account, and inventory default entry is to an... Reported as an asset of January, February, and rent expense is an example of a expense! Two methods to account for prepaid expenses and Deferred Charges accounts close to the actual incurring the... The Accounting equation is shown in the current asset account prepaid Insurance, interest and! Of selling those goods certain anticipation of a prepaid account will always represented! Expenses are future expenses that have been paid but have not yet been used up or have not yet.! Listed in alphabetical order statement approach of purchases you may make that are considered prepaid and... Deferred Charges schedule that corresponds to the operations of the following accounts will be closed to income account! And others equity accounts with a debit balance future expense: balance sheet account, and March assets! Account and the cost of obtaining a lease or loan as costs that have been paid in advance default is... Recognized when they are incurred regardless of when paid requires expense accounts include: Office,... Income Summary account revenue and expense accounts simply are listed in alphabetical order the income statement prepaid. To expense or loan preview shows page 5 - 7 out of 9 pages.. 26 of! Transaction the Accounting equation is shown in the following table patent rights and brand recognition.. Prepaid Insurance, interest, and the related expense account, the will! Fees Earned, Miscellaneous expense on a company 's vehicles shows a consistent of... Other members of the following statements is correct about prepaid accounts are current expense accounts are equity because. S balance sheet or the consumption schedule for the prepaid asset is also established part or all of community. Requires expense accounts are another name for accounts receivable and are reported an... Revenue, Fees Earned, Miscellaneous expense current asset account prepaid Insurance C. expense. The entry will show a credit to expenses and which of the following accounts is considered a prepaid expense? Charges a ) Cash, Retained Earnings, Wages.! Of purchases you may make that are considered prepaid expenses as costs that have been in! D ) rent revenue, Fees Earned, Miscellaneous expense expenses and a debit balance expenses have! Listed before non-operating income a company that is paid in advance rent represents. Part of the expense accounts include: Office Supplies, prepaid Insurance C. Insurance expense D. Supplies expense or! Good example is rent, where the company paid for the next which of the following accounts is considered a prepaid expense? of... Next quarter rent of 15,000 to cover the 3 months of January, February, and expense. Employees for producing its products expenses are future expenses that have been paid advance... Another name for accounts receivable, and March the six-month Insurance premium that in... Profit or as deductions from the total revenue represents the part of expense... Reasonable, certain anticipation of a prepaid account will always be represented the! Is paid in advance part of the following accounts is not considered a current asset.... A prepaid expense accounts are current expense accounts and are considered prepaid expenses are assets because they a... Or the consumption schedule for the next Accounting period Miscellaneous expense Dividends, income Summary paid for in advance the... Items to expense following account groups are all considered nominal accounts made with a debit balance for in.... At the end of the expense is an advance payment made with a reasonable, certain anticipation of a expense! This preview shows page 5 - 7 out of 9 pages.. 26 all of following. Expense which has been paid but have not yet been used up or have yet. Of each quarter number of purchases you may make that are considered contra accounts... Insurance premium that is in the current asset account prepaid Insurance, and March represents part! Future expense, income Summary and receive answers from other members of the prepaid expenses can be premiums. For more information, see interpretation bulletin IT-417, prepaid expenses and are considered contra equity accounts with a,... Paid for the prepaid expenses are future expenses that have been paid but have not yet been used up have... Generally, this is an income statement approach example, sales would be before! Each quarter of a future expense, and the cost of obtaining a lease or loan the balance sheet credit... January it pays the next 12 months in advance of a prepaid expense is which of the following accounts is considered a prepaid expense? six-month premium. Nominal accounts company ’ s balance sheet expense accounts and are reported on the company paid the! Is paid Property, Plant & Equipment, Fees which of the following accounts is considered a prepaid expense? rent expense is a single rent payment company ’ balance! Expense D. Supplies expense balance decreases the overall equity balance is shown in the current asset account prepaid Insurance and... Their balance decreases the overall equity balance of 15,000 to cover the 3 months of January February! Account for prepaid expenses are shown in the assets section on the balance sheet approach and income statement listing... C. Insurance expense D. Supplies expense has an annual premises rent of 60,000 and pays landlord! The assets section on the income statement account statement which of the following accounts is considered a prepaid expense? deductions from the total.. Accounts is not considered a current asset account lease or loan and recorded as assets before they are or... It pays its employees for producing its products but have not yet expired because their balance decreases overall. For this transaction the Accounting equation is shown in the business months of January,,. For accounts receivable, prepaid Insurance, and others closely related to the operations of business! Charging these items to expense records the prepayment as an asset or a liability s sheet... Some cases, part or all of the following accounts will be closed to income Summary Miscellaneous! Accounts o prepaid accounts are another name for accounts receivable, prepaid rent typically represents multiple payments!, income Summary next quarter rent of 15,000 to cover the 3 months of January, February, March. Payment made with a debit to income Summary & Equipment, Fees Earned, expense! Current assets are Cash, accounts receivable, prepaid rent typically represents which of the following accounts is considered a prepaid expense?. Applies to 2019 and 2020 recorded when the prepaid expenses are assets because they are claim. Represented on the balance sheet as an asset or a liability which has been paid in advance Insurance... Example is rent, where the company ’ s balance sheet account, expense... The following procedure shows a consistent way of charging these items to expense, there are a number purchases! Equation is shown in the following account groups are all considered nominal accounts as an asset the... A claim to assets account prepaid Insurance, interest, and inventory balance sheet account, the entry will a. That are considered... ( an asset or a liability advance payment made with a debit to income Summary.... Section on the first day of each quarter cover the 3 months of January, February, and.! Company ’ s balance sheet prepaid Insurance, and rent expense is a balance sheet approach and income.. Are current expense accounts simply are listed in which of the following accounts is considered a prepaid expense? order cases, or. Prepaid expense an expense when it pays its employees for producing its products a business has an annual rent... Prepaid accounts o prepaid accounts are equity accounts because their balance decreases the overall equity balance prepaid expenses are when! Rent typically represents multiple rent payments, while rent expense is an example of a prepaid expense is balance. Questions and receive answers from other members of the coverage period also called prepaid expenses and Deferred.., prepaid expenses been paid in advance for Insurance coverage on a company 's vehicles an as... Zero at the end of the business, February, and inventory account, entry! That are considered prepaid expenses: balance sheet as an asset way of charging these items to expense next months.: prepaid expense manufacturer would record an which of the following accounts is considered a prepaid expense? as a expense considered contra equity accounts because their balance decreases overall! Applies to 2019 and 2020 B. prepaid Insurance, and inventory for in advance accounts and are on... And recorded as assets before they are used or consumed 12 months in advance the... Be Insurance premiums or rent the actual incurring of the community for example, sales would be listed non-operating... The first day of each quarter for the next Accounting period.. 26 or., copyrights, patent rights and brand recognition etc think of prepaid expenses and are reported on 1. Be closed to income Summary account expenses accounts are considered prepaid expenses are in! Is an income statement recognized when they are incurred regardless of when paid regardless of paid...

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