TheBlackLineAccount Reconciliationsproduct, a full account reconciliation solution, has a prepaid amortization template to automate the process of accounting for prepaid expenses. This journal entry credits the prepaid asset account on the balance sheet, such as Prepaid Insurance, and debits an expense account on the income statement, such as Insurance Expense.ĭoing so records the incurring of the expense for the period and reduces the prepaid asset by the corresponding amount. An amortization schedule that corresponds to the actual incurring of the prepaid expenses or the consumption schedule for the prepaid asset is also established.Īt the end of each accounting period, a journal entry is posted for the expense incurred over that period, according to the schedule. This records the prepayment as an asset on the companys balance sheet. When there is a payment that represents a prepayment of an expense, a prepaid account, such as Prepaid Insurance, is debited and the cash account is credited. In each month of the 12-month policy, the company would recognize an expense of $1,000 and draw down the prepaid asset by this same amount. If a company pays $12,000 for an insurance policy that covers the next 12 months, then it would record a current asset of $12,000 at the time of payment to represent this prepaid amount. ![]() Insurance is an excellent example of a prepaid expense, as it is customarily paid for in advance. The expense is then transferred to the profit and loss statement for the period during which the company uses up the accrual. With amortization, the amount of a common accrual, such as prepaid rent, is gradually reduced to zero, following what is known as an amortization schedule. This allocation is represented as a prepayment in a current account on the balance sheet of the company. Prepaid expense amortization is the method of accounting for the consumption of a prepaid expense over time. After the benefits of the assets are realized over time, the amount is then recorded as an expense. On the balance sheet, prepaid expenses are first recorded as an asset. Prepaid expenses are future expenses that are paid in advance.
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