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What are Prepaid Expenses? – Let us help you to understand!
Prepaid expenses refer to assets that turn into expenses while they get used up or expire. These are expenses that are paid in advance, that is, the expenditures that are not recognized but for which the payment has been done. These are the costs, the benefits for which have not been received in a specific year but for which payment has been done.
Let us inform that, until office supplies are used in the course of business operations, they are regarded as an asset. When they are used during business, they turn into an expense. Adjusting entries, at the end of every accounting period, are needed for recognizing the part of prepaid expenses that have turned into actual expenditures in the course of time or through use.
Now to put it simple, these expenses are the costs that companies have in the course of time or anticipate to be having sometime in future, for which they pay ahead of time. These are common expenditures, given that there are many examples when payment is necessary for services or goods before they are obtained. Some firms need payment prior to the shipping of an item, and the cost is entered in the accounting records as a prepaid expense. Usually, some of the prepaid expenses consist of insurance, rent and utilities.
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