Payments made in advance for goods or services to be received in the future, recorded as current assets and expensed over the benefit period.
Prepaid Expenses represent future economic benefits paid for upfront. Common examples include: insurance premiums paid annually, rent paid in advance, annual software subscriptions, maintenance contracts, and advance tax payments. They are initially recorded as current assets on the balance sheet and systematically expensed (moved to P&L) over the period they benefit. This follows the matching principle — expenses are recognized in the period they relate to, not when cash is paid. At each month-end close, an adjusting entry debits the expense account and credits the prepaid asset. Under Ind AS, prepaid expenses are classified as current assets if they will be consumed within 12 months, or non-current assets if they benefit periods beyond 12 months.
Company pays ₹2,40,000 annual insurance on April 1, 2026. Initial entry: Debit Prepaid Insurance ₹2,40,000, Credit Bank ₹2,40,000. Monthly adjusting entry: Debit Insurance Expense ₹20,000, Credit Prepaid Insurance ₹20,000. By September 30: Prepaid balance = ₹2,40,000 − (6 × ₹20,000) = ₹1,20,000 (shown as current asset).
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Prepaid expense is an asset with a normal DEBIT balance. It sits on the balance sheet under current assets. As the benefit is consumed, it is credited (reduced) and the corresponding expense account is debited. When fully consumed, the prepaid balance reaches zero.
Prepaid expense is for services/benefits already contracted and being consumed over time (insurance, rent, subscriptions). Advance to supplier is for goods/services not yet received or started. Prepaid appears under 'Other Current Assets'; advance appears under 'Advance to Suppliers' or 'Trade Advances'. Both are current assets.
Expenses that have been incurred but not yet paid or recorded in the accounting books at the end of an accounting period.
Assets that are expected to be converted to cash or consumed within one year or one operating cycle, whichever is longer.
An accounting principle that requires expenses to be recorded in the same period as the revenues they help generate, ensuring accurate profit measurement.
The process of reviewing, adjusting, and finalizing all financial transactions for a month to produce accurate financial statements and management reports.
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