What are prepaid expense and their journal entry in Accounting?

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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 

  1. When we have to ADD Asset in business we have Debit that accounts
  2. When we have to MINUS Asset in business we have Credited that accounts
  3. When we have to ADD Liability  in business we have Credited that accounts
  4. 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. 

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