Prepaid expense is an expense you had paid for in advance. Think of your EZ link card. You top up your EZ link card with $20. At this moment, did you use any of the expense? No, the amount of money is in the card and you had not use any of the value for transport.
In other words, you had just prepaid transport expense into the card for later use. Is the card valuable to you? Yes, it has $20 in it. So, it is an asset. Is the card a non current asset? No, the value is not going to last you more than a year. (You will be using the value most probably within the year.) so, it will be a current asset.
What if you had prepaid expenses at the start of the year?
When you had prepaid expenses at the start of the year, it works as if you had credits paid before using it. That means most likely you will be using the expenses during this year. You should include it as expenses incurred in this year.
The double entry for prepaid expenses for the start of the year will be –
-DR Expenses
-CR Prepaid Expenses
What if you had prepaid expenses at the end of the year?
If you had prepaid expenses at the end of the year, that will mean you had not used the prepaid expenses at the end of the year. This will indicate that the prepaid expenses are not expense for this year thus, you will ‘remove’ it from your expenses account
The double entry for prepaid expense at the end of the year will be
-DR Prepaid Expense
-CR Expense
If you want to know the techniques to learn for learning Principles of Accounts (POA), read up Learning Principles of Accounts (POA) and Scoring As.
Felix Lim is the coach for Principles of Accounts (POA) Tuition class in Edulight Learning Hub. Experience in the line of coach Principles of Accounts (POA) for over 10 years, he understood well how students learn through the wrong methods. He seeks to correct the wrong methods of learning in Principles of Accounts (POA) and advocate “Understanding not Memorizing” in his teachings.
You can visit Edulight Learning Hub to understand more about him and his tuition sessions.