Prepaid Expense: Definition and Example

Amortizing prepaid expenses can be a challenge for companies that rely on manual accounting processes because this leaves room for human error. And with an Excel-based solution like Datarails that fits into your existing workflow, you don’t even have to waste time and resources to learn a completely new tool. At the end of each accounting period, a journal entry is posted for the expense incurred over that period, according to the schedule.

• No insurance company would sell insurance that covers a past event, so insurance expenses must be prepaid by businesses.
• Then, over time, as the asset provides its value, it gets recorded as an expense (on the income statement) during the same accounting period as when the asset delivers its value.
• The product then automatically amortizes the expense over future periods, eliminating the need to manage spreadsheets or other manual tracking systems.
• World-class support so you can focus on what matters most.BlackLine provides global product support across geographies, languages, and time zones, 24 hours a day, 7 days a week, 365 days a year.
• This thereby notes that the prepayment is a type of asset on the firm’s balance sheet.

Once consumption has occurred, the prepaid expense is removed from the balance sheet and is instead reported in that period as an expense on the income statement. If the total ending balance in the prepaid expenses account is quite small, it may be aggregated https://kelleysbookkeeping.com/the-difference-between-a-trial-balance-and-balance/ with other assets and reported within an “other assets” line item on the balance sheet. According to generally accepted accounting principles (GAAP), expenses should be recorded in the same accounting period as the benefit generated from the related asset.

What is accrual accounting?

Companies come to BlackLine because their traditional manual accounting processes are not sustainable. We help them move to modern accounting by unifying their data and processes, automating repetitive work, and driving accountability through visibility. Since our founding in 2001, BlackLine has become a leading provider of cloud software that automates and controls critical accounting processes. Timely, reliable data is critical for decision-making and reporting throughout the M&A lifecycle. Without accurate information, organizations risk making poor business decisions, paying too much, issuing inaccurate financial statements, and other errors.

While you are innovating to produce safe, reliable, and sustainable products and services, our solutions help accounting teams save time, reduce risk, and create capacity to support your organization’s strategic objectives. Prepaid expenses are recognised as a type of asset because they represent products and services whose benefits will only be incurred at a later date. The records will reflect that incurred expense for the period, which will What Are Prepaid Expenses? reduce the prepaid asset by that amount. A financial automation software solution can do the work for you so that you can ensure nothing slips through the cracks. At the end of the asset’s life span, it will zero out (and you won’t have to worry about having made any human errors or having forgotten about a prepaid expense). Even though the cost of the asset (expense) has been made already, it isn’t yet an expense in the financial records.

Are Prepaid Expenses Debits or Credits?

BlackLine’s glossary provides descriptions for industry words and phrases, answers to frequently asked questions, and links to additional resources. It’s time to embrace modern accounting technology to save time, reduce risk, and create capacity to focus your time on what matters most. Maximize working capital with the only unified platform for collecting cash, providing credit, and understanding cash flow.