Prepaid expenses are recorded first on the balance sheet-in the prepaid asset account-because it represents a future benefit due to the business. The expense is then transferred to the profit and loss statement for the period during which the company uses up the accrual. With amortization, the amount of a common accrual, such as prepaid rent, is gradually reduced to zero, following what is known as an amortization schedule. This allocation is represented as a prepayment in a current account on the balance sheet of the company. Prepaid expense amortization is the method of accounting for the consumption of a prepaid expense over time.
There may also be tax benefits concerning prepaid expenses, however, all organizations must follow the proper rules related to tax deductions. Prepaid expenses may also provide a benefit to a business by relieving the obligation of payment for future accounting periods. Sometimes, businesses prepay expenses because they can receive a discount for prepayment.
What Are the Benefits of Prepaid Expenses? As the benefits of the good or service are realized over time, the asset's value is decreased, and the amount is expensed to the income statement. The business records a prepaid expense as an asset on the balance sheet because it represents a future benefit due to the business. Prepaid expenses usually relate to the purchase of something, such as rent or insurance, that provides value to the business over several accounting periods (often six months or a year). Prepaid expenses are considered current assets because they are amounts paid in advance by a business in exchange for goods or services to be delivered in the future. As the benefits of the assets are realized over time, the amount is then recorded as an expense. On the balance sheet, prepaid expenses are first recorded as an asset. Prepaid expenses are future expenses that are paid in advance, such as rent or insurance.
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