What are prepaid expenses and their journal entry in Accounting?
Prepaid expense
A prepaid expense is an expense that is paid in advance and its benefits is yet to received ..
A prepaid expense is an advance payment of expense before its benefits is yet to be received.
Prepaid expense are Asset by nature and comes under the category of Current Assets.
Journal entry of prepaid expense ?
Before understanding prepaid expense journal entry we have to understand the rule of debit and credit in accounting.
Point to remember before creating journal entry of Perpaid Expense
- When we have to ADD Asset in business we have Debit that accounts
- When we have to MINUS Asset in business we have Credited that accounts
- When we have to ADD Liability in business we have Credited that accounts
- When we have to MINUS Liability in business we have Debit that accounts
We can understand prepaid expenses with the example.
Suppose we have paid our Rent in advance paid to to its tenant Rs 10,000
Journal entry for the same will be
Prepaid Rent A/c Dr 10,000
To cash A/c Dr. 10,000
(being rent paid in advance )
Here Prepaid rent is Asset therefore its debited and added in business.
Example of Prepaid Expense
Example :- Rent paid for Jan Rs 10,000 actual rent Rs 5,000.
Journal entry for the above transaction will be.
Prepaid Rent A/c 5,000
Rent A/c 5,000
To Cash A/c 10,000
(being rent paid and prepaid )
here we have paid Rs 5,000 as advance rent which is an asset we have to adjust it in future.
Here we add Prepaid Rent because we ADD Asset to our business.
Now when the month Feb will come to the journal entry will be an adjustment of Advance rent which we have paid earlier.
Rent A/c 5,000
To Prepaid Rent A/c 5,000
(being rent paid and prepaid adj)
here we Credit Prepaid account because its minus our asset from the business
Example of Salary in outstanding salary expense.
Salary paid for the month of Jan Rs 5,000 actual salary Rs 10,000
Journal Entry for the same will be .
Salary A/c Dr. 10,000
To cash A/c 5,000
To salary payable A/c 5000
Credit liability as Liability ADD
(being salary paid and payable salary)
Now in the month of feb the adjustment of salary will be made.
Salary A/c Dr. 10,000
Outstanding salary A/c Dr. 5,000
To cash A/c 15,000
(being salary paid of last month salary)
Debit liability to deduct liability – from business
Example of Salary in Prepaid expense.
Salary paid for the month of Jan Rs 15,000 actual salary Rs 10,000
Journal Entry for the same will be .
Prepaid Salary A/c Dr. 5,000
Salary A/c Dr 10,000
To cash A/c 15,000
Debit Asset to ADD Asset + from business
(being salary paid with advance salary)
Now in the month of feb the adjustment of salary will be made.
Salary A/c Dr. 10,000
To cash A/c 5000
To Prepaid Salary A/c 5000
(being salary paid and adjustment of last month salary)
Credit Asset to deduct Asset – from business
Adjustment at the end of Accounting year
Our accounting Start at 1 April and end on 31 of March every year
Therefore the accounts closed on 31 of the march have closing balances and the accounts on 1 April have opening balances.
Example :
Expense paid in advance at the end of the accounting year is Prepaid expense.
Suppose stationary purchase during a year Rs 12,000 but the stationary unused left Rs 5,000
therefore we have to pass an entry at the end of the accounting year
Unused stationary A/c 5,000
To stationary A/c 5,000
(being stationary unused)
Note: This unused stationery is an asset by nature and it can be transferred to next year as opening unused stationery.
Similarly, our prepaid salary, Prepaid rent, and all prepaid expense which not paid in the particular accounting period are transfer to the next accounting year as the opening.
Note: Expense is not transferred to the next accounting year its only asset and liabilities which are transfer to the next accounting year. but expense which are outstanding and prepaid are shown in Profit and loss and trading accounts.