![]() At the end of January, for example, the asset account would reduce by $1,000 (reflecting 1/12th of the yearly payment being used), and the expense account on the income statement would increase by $1,000.Then, over the course of the year, it would gradually be charged as an expense, reducing the asset balance as time goes on. This means that if you prepay $12,000 worth of rent for 1 year on January 1st, it would first be placed on the balance sheet as an asset.The basic process of accounting for pre-paid expenses involves placing the pre-paid expense on the balance sheet as an asset when the expense is paid, and then gradually charging it as an expense over the period it is being used. Understand the basic accounting process for pre-paid expenses. This principle dictates that expenses should be recorded when the associated goods or services have been used, not when they are paid for, so that the expense matches the revenues that the expense helped to earn. Something known as the matching principle is what governs the treatment of prepaid expenses.In this case, every month for the six month period, one sixth of the total rent amount will appear on the income statement. Rather, the expense would be recorded over the six month period as the expense is "used up". As an example, if you are paying rent six months in advance, the pre-paid expense would not be recorded in the month when you send the check to the landlord. ![]() Expenses, in the same way, are not recognized when cash is paid out (or when the pre-paid expense is paid for), and are rather recognized over time as the thing that was pre-paid is used. Accrual accounting requires that revenues be recognized in the period for which they are earned (not when cash is received), and the same principle applies to expenses. Familiarize yourself with the link between accrual accounting and pre-paid expenses.
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