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The entry must be reversed after the benefit is realized.
#ARE PREPAID EXPENSES AN ASSET FULL#
Remember that while ABC Government paid for rent at the beginning of the year, they have not received the full service, which means rent is an asset with future benefit because the landlord owes ABC Government the space for the remainder of the one year contract.Īfter one month, how would ABC Government reverse this entry? How would ABC Government record this transaction? The landlord requires ABC Government to pay the full annual amount of $180,000 at the beginning of the year. The following is an example of the consumption method for prepaids.Īn example often used for prepaids is rent:ĪBC Government signs a one-year lease on a building for $15,000 a month. Most governments will use the consumption method in the governmental fund statements, unless those transactions are immaterial to the statements. GASB allows users to record prepaids on the purchase method for governmental funds, but that fact must be disclosed in the summary of significant accounting policies of the financial statements. It is also important to note that prepaids are recorded during the accounting period when the transaction has incurred and expensed throughout later periods as the benefits are realized (consumption method). Therefore, prepaids are classified as an asset.ĭon’t miss: Commonly missed year end balance sheet reclass entries Why is Prepaid Expense an Asset? What is a Prepaid?Ī prepaid is when you pay for a good or service in advance, so it represents an expenditure that has future benefit, and assets are things with future benefit. But what makes it difficult? Not understanding the fundamentals of how accounts work, without understanding the relationships and purpose of each account, nothing will make sense! So, today, Henry+Horne is here to help you understand the difference between prepaids and accounts payable.įirst, let’s make it clear: prepaid expenses are an asset, and accounts payable is a liability. Let’s be honest, accounting can sometimes be a challenge.