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Why is prepaid expense classified as an assset on the balance sheet?
Wiki User
∙ 10y ago
This has to do with the matching principle of accounting.
Example: A company has a December 31 year-end, but its rental agreement on a building stipulates that a full year of rent must be paid by the company on December 1 of each year. The payment will cover rent on the building from December 1, 20X1 to November 31, 20X2. The rental payment is $120,000 per year.
If the company expenses the full $120,000 payment in its December 31, 20X1 fiscal year, it will be recording an expense for a payment that it will benefit from in the future (access to the rented premises). Instead, 1/12 of the amount is expensed in the current fiscal year (representing use of the premises during December), and the remaining amount is recorded as an asset (Prepaid Expense), because the company will receive a future benefit from it, and it would be incorrect to expense the entire amount in the 20X1 fiscal year.
Wiki User
∙ 10y ago
Wiki User
∙ 10y agoPrepaid expenses are those payments which have paid already but actual expenses not yet occured that's why these are current assets and shown in balance sheet.
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