IGCSE Accounting for Prepaid Expense
We will learn when a business records expense as incurred and when is expense considered prepaid. We will also learn how to adjust for prepaid expense and record in the expense account and financial statements.
Related Lessons:
Determining Prepaid Expense
Expense is regarded as incurred when the benefit has been used, regardless of whether payment is made.
Expense is regarded as paid in advance when payment is made before receiving the intended services. Therefore, prepaid expense is a current asset to the business.
To calculate prepaid expense:
- Calculate total expense incurred for the accounting period.
- Determine the total amount paid for the accounting period.
- Amount paid in excess of total expense incurred is regarded as prepaid expense.
Adjusting for Prepaid Expense Brought Forward
Expense paid in the previous accounting period is carried forward to the next accounting period when the business receives the service owed to it. At this point, the amount is no longer treated as a current asset and is recognised as expense incurred.
Therefore, the amount is transferred from the current asset account to the expense account to record the expense for the current year, as the benefit has now been used.
This amount is recorded as “Balance brought down” on the debit side of the expense account.
Recording Prepaid Expense
1. Prepaid expense brought forward is recorded on the debit side as “Balance brought down”
2. Expense paid during the year increases our expenses, and is therefore recorded on the debit side as Cash or Bank
3. Expense incurred for the current period is recorded on the credit side as Income Statement
4. Prepaid expense for the current period is recorded on the credit side as “Balance carried forward”
Recording in the Financial Statements
Amount transferred from the expense account to the Income Statement is recorded in the Income Statement as an Expense.
The amount of prepaid expense at the end of the current accounting period is recorded in the Statement of financial position under Current Asset as Other Receivables.