What is the accounting treatment of a prepaid expense?
Answer
Originating entry to record the payment of cash and the prepaid asset reflecting future benefits.
A subsequent adjusting entry to record the expense and eliminate the prepaid asset.
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Parent (intermediate) annotation
Open it Prepaid expense arises when a company makes a cash payment prior to recognizing an expense. In the illustration, in Transaction 3, the company prepaid one month’s rent. The accounting treatment involves an originating entry to record the payment of cash and the prepaid asset reflecting future benefits, and a subsequent adjusting entry to record the expense and eliminate the prepaid asset. (See the boxes showing the accounting treatment of Transaction 3, which refers to the originating entry, and Transaction 3a, which refers to the adjusting entry.) In other words, prepai
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Open it ved and the corresponding liability to deliver newsletters) and, subsequently, 12 future adjusting entries, the first one of which was illustrated as Transaction 12. Each adjusting entry reduces the liability and records revenue.
<span>In practice, a large amount of unearned revenue may cause some concern about a company’s ability to deliver on this future commitment. Conversely, a positive aspect is that increases in unearned revenue are an indicator of future revenues. For example, a large liability on the balance sheet of an airline relates to cash received for future airline travel. Revenue will be recognized as the travel occurs, so an increase in this liability is an indicator of future increases in revenue.
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