Meaning & Definition:
Prepaid expenses are expenses that a company pays in advance but will be recognized as expenses in future accounting periods. This means that the company has already made a payment for goods or services that it will receive or use in the future.
However, they cannot recognize these expenses as immediate expenses because they have not yet received the goods or services they paid for. These expenses are initially recorded as assets on the balance sheet because the company has already paid for them but has not yet received the goods or services.
As the goods or services are received or utilized, the prepaid asset is gradually recognized as an expense on the company’s income statement over the period of time they are consumed or utilized. The purpose of recording prepaid expenses is to ensure that expenses are recognized in the correct period, which can have a significant impact on a company’s financial statements and financial performance.
Examples:
- Insurance expenses ( Insurance paid for the period Jan-23 to Dec-23 as on 31st March 2023, Here we record prepaid expenses for 9 months i.e. April-23 to Dec-23)
- Rent expenses
- Salaries Paid
- Electricity bills
- Interest expenses
- Advertisement expenses
- Taxes or Statutory dues
