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Prepaid or Unexpired Expenses


In some cases, the benefit of the amount already spent will be available in the next accounting year also. Such a part of the expense is called a ' prepaid expense'. Common examples of such expenses are unexpired insurance, interest paid in advance, etc. in such situations, it is necessary to adjust unexpired part of expense in the concerned expense in order to get the true and fair financial position of the business.

 

The adjusting entry for prepaid expense is -
Prepaid Expense A/c Dr.
To Expense A/c

 

Where the prepaid expenses are shown in the Trial Balance, it means that the adjustment entry has already been passed. In such a case, prepaid expenses will be shown only in the Balance Sheet as a current asset.

 

Example 2 - Insurance premium of Rs. 4, 000 is paid on 1st July 2007 and the accounts are to be closed on 31st March 2008. the benefit of the insurance policy will accrue upto 30th June 2008; in other words, insurance benefit for three months, ie., 1st April to 30th June 2008 will be derived in the next accounting year, 1/4th of the premium should therefore, be charged to the Profit and Loss Account for the next year. For this purpose, the entry to be passed is:

 

Prepaid Insurance Premium A/c Dr. 1,000
To Insurance Premium #9;    1,000

 

Prepaid or Unexpired insurance premium is treated in the Final accounts as follows:

 

Insurance Premium A/c

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Bank

4,000

 

 

 

 

 

 

4,000

 

By Prepaid insurance premium

 

By Profit & Loss A/c

1,000

 

 

 

3,000

 

 

4,000

 

 

 

Prepaid Insurance Premium

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Insurance Premium

1,000

 

1,000

 

By Balance C/d

1,000

 

1,000

 

 

Profit and Loss Account

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Insurance Premium 4,000

Less: Prepaid 1,000

----------

 

 

 

3,000

   

 

Balance Sheet

Liabilities

Assets

 

Current Assets 1,000

 

Next year, the Prepaid Insurance Premium Account is transferred to the Insurance Account. The principle applies to all expense incurred during the year but whose benefit (partially or wholly) will accrue in the next year.






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