![]() What Is Prepaid Expense Amortization?Īmortization is an accounting technique that helps you account for the consumption of a prepaid expense over a period of time. Paying upfront can help you avoid the rising cost of goods and services, receive a discount, and take advantage of tax deductions. This copier benefits your company for the whole year, instead of a month or a quarter which is generally the accounting period. And according to GAAP (generally accepted accounting principles), when you record an expense, you must realize the benefit from the asset in the same accounting period.įor instance, you decide to rent a copier for the year. ![]() ![]() Prepaid expenses cannot be expensed as soon as you pay for a service or goods because your business benefits from it over a period of time. A prepaid expense is recorded as a type of asset on the balance sheet and as an expense on the income statement when it’s utilized. What Are Prepaid Expenses?Ī prepaid expense is an advance payment for goods or services that are received in the future. Understanding how prepaid expenses actually work can help you record and calculate them accurately for the balance sheet and income statement. Inflated assets can cause problems with budgeting and when it’s time to file taxes. Failure to adjust these expenses accurately leads to the account balance remaining the same, which overstates the value of any prepaid expenses as an asset. Immediately expensing prepaid expenses can cause profits to fluctuate, making performance benchmarking over a period of time difficult. Despite the name, prepaid expenses aren’t recorded as expenses initially - they’re considered assets.Īnd you have to be careful while recording them. Don’t let the word “expenses” in prepaid expenses fool you.
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