This document discusses prepaid expenses. It explains that a prepaid expense occurs when a business pays for an expense in advance, such as paying $4,000 rent for the next 4 months on January 1st. On the balance date, the prepaid amount is split between an expense and an asset. The expense is the amount that has been used, while the asset is the unused amount that will be applied to future periods. For example, on March 31st the business would report $3,000 as a rent expense and $1,000 as a prepaid rent asset on the balance sheet.

1. 14.3
PREPAID EXPENSES

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 A Prepaid Expense occurs when a business pays for an expense in
advance
 On balance-day, not all of the expense has been consumed
 E.g. a firm reports quarterly – on 1 January it prepays $4,000 rent for
the next 4 months
14.3 PREPAID EXPENSES
Balance-Day
1 January
Prepaid $4,000 for
4 months rent
1000
January February March April May June
1000 10001000
Reporting Period

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 On balance-day, the prepayment is split into two parts:
1. Expense – the amount that has been used up (consumed)
2. Asset – the amount that has not yet been used up (unconsumed)
Balance-Day
1 January
Prepaid $4,000 for
4 months rent
1000
January February March April May June
1000 10001000
EXPENSE $3,000
ASSET
$1,000
ASSET $1,000
• A resource controlled by the firm –
it has a legal claim to April’s rent
• Arising from a past event – the
prepayment on 1 January
• Will provide a future economic
benefit – renting the property in
April
14.3 PREPAID EXPENSES
EXPENSE $3,000
• There is an outflow of economic
benefits – the business has
consumed rent for 3 months
• There is a decrease in Assets – the
Prepaid Rent asset
• There is a decrease in Owner’s
Equity

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
1000
January February March April May June
1000 10001000
EXPENSE $3,000
ASSET
$1,000
Balance Sheet at 31 Mar
Current Assets $
Prepaid rent 1000
Income Statement Jan-Mar
Other Expenses $
Rent expense 3000
14.3 PREPAID EXPENSES

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ5 X
Ex14.2 X