Prepaid Expenses

Prepaid expenses are a type of asset that represent payment made by a business for goods or services that will be received in the future.  Essentially, it is an expense that is paid for in advance of the benefit being received.  Pre-paid expenses are a type of assets on the balance sheet that results from a business making advanced payments for goods or services to be received in the future. Prepaid expenses are usually recorded as current assets and the value of the prepaid expenses is expensed over time as the goods or services are utilized for business activities.

Prepaid expenses are recorded on a business’s balance sheet as assets, because they represent resources that the business has paid for but not yet used.  As the benefit is received, the asset is gradually recognized as an expense on the income statement, reducing the balance of the prepaid asset account.

Examples of prepaid expenses include prepaid rent, prepaid insurance premiums, and prepaid subscriptions.  The common example of a prepaid expense would be insurance premiums that are paid annually. At the end of the fiscal year, any amount of insurance premium related to the fiscal year would be expensed, but the insurance premium related to the upcoming fiscal year will be accrued as prepaid expenses that will be expensed until the period of insurance has ended.

Prepaid expenses can be useful for businesses that need to pay for certain expenses in advance.  By paying in advance, businesses can ensure that they have access to the goods or services they need and can budget accordingly.  However, it is important for businesses to property track and account for expenses in the proper period to align with accurate financial reporting and avoid mismanagement of cash flow. 

If you have any questions regarding Prepaid expenses, please don’t hesitate to get in touch with us. Shajani LLP Chartered Professional Accountants and Advisors have a team of Calgary Accountants, Edmonton Accountants and Red Deer Accountants ready to assist you in your personal and corporate tax filings and tax planning strategy.  

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Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.