When running your business, do you pay for goods or services before you receive the benefit from them? If so, then you should record these as prepaid expenses.
What Are Prepaid Expenses?
Prepaid expenses are expenses you pay for items or services ahead of the time you use or benefit from them. In prepaid expense accounting, these expenses are current assets. They’re assets because you benefit from them in the future, usually within 12 months. If the expenses cover items you receive after 12 months, you consider the expenses as deferred expenses for accounting purposes.
Prepaid Expenses Examples
As you operate your business, three classic examples of prepaid expenses you might encounter are rent, insurance, and subscriptions. Accountants consider prepaid rent as an asset on your financial statements, and prepaid insurance is a current asset, too. With insurance prepayments, you’re buying protection for potential future damage, such as motor vehicle collisions, fires, or floods. Other examples of prepaid expenses you might incur include legal retainer fees, healthcare coverage, property taxes, and maintenance services.
Reaping Benefits of Prepaid Expenses
You might want to prepay an expense when it’s for something you need, you have the money to pay for it, and you don’t want to risk paying a higher price later. Some businesses encourage this by offering discounts for prepayment. These deals happen often with subscriptions to magazines and newspapers, or for services such as couriers or vehicle maintenance. Certain providers of goods and services may require you to prepay some expenses, such as rent and property taxes.
Another reason for prepaying expenses is that you may be able to take them as tax deductions. You should make sure you’re recording your expenses properly, and consult with your accountant about deductions you can take and when to take them.
When you incur prepaid expenses, record them accurately and take full advantage of the benefits they provide. Keep your books accurate and up to date automatically. Change the way you manage your finances now.