![]() ![]() ![]() It would be incorrect to charge the whole $4,800 to 2019's profit and loss account. The premium covers twelve months from 1 September 2019 to 31 August 2020, i.e., four months of 2019 and eight months of 2020. However, only a part of this amount relates to 2019. The trial balance, drawn up on 31 December 2019, assumed that he had no other insurance and his insurance expenses account would show a balance of $4,800. When he paid this premium, he debited his insurance expenses account with the full amount, i.e., $4,800. John bought a motor car and got it insured for one year, paying $4,800 as a premium. Prepaid Expenses: ExplanationĪt the end of the year, there may be expenses whose benefits have been received but not paid for and expenses that may have been paid, but their benefit will appear in the next financial year. ![]() The first portion, comprising received benefits, is an expense.Īs for the second portion, which involves the incoming benefits or services used in the coming period, this represents current assets, otherwise known as unexpired expenses, prepaid expenses, or expenses paid in advance.Īt the end of the accounting period involving advance payment, the expired portion becomes part of the income statement like any other expense the unexpired portion becomes part of the balance sheet like any other current asset. Unexpired or prepaid expenses are the expenses for which payments have been made, but full benefits or services have yet to be received during that period. ![]()
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