Today we interview a local CPA firm in North Indianapolis about a common accounting misconception - Prepaid Expenses:
According to the CPAs in North Indy we spoke with, a prepaid expense account is debited when an expense is paid in advance. An expenditure made in the current period that will benefit both the current and future periods is another safe definition.
- The initial debit is made to an asset account.
- At the end of the accounting period, an adjusting entry is made that records, in an expense account, the amount that has been used up or has expired for the accounting period.
Common examples of this include a 2 year purchase on an insurance policy for a company. At the end of the year, the adjusted journal entry to record the amount of insurance that has expired and must be reclassified as an expense would appear as:
December 31 - Insurance Expense 1,000