A:

Prepaid expenses are not recorded on an income statement. When the prepaid expense becomes due, the expense is recognized on a company's income statement as a normal expense in the period when it became due.

When a company prepays for an expense, it is recognized as an prepaid asset on its balance sheet and reduces the company's cash by the same amount, keeping the balance sheet in balance. When the expense becomes due, the prepaid expense account is reduced by the amount of the expense and the expense is recognized on the company's income statement in the period when it was due.

The best example of this is when a company prepays for the rent of its office space, which is a common occurrence. When a company does this, it doesn't recognize the entire prepaid amount on its income statement and instead recognizes the entire prepaid amount on its balance sheet. As each month's rent becomes due, the prepaid rent account on its balance sheet is reduced by the amount of the monthly rent, and the rent is recognized as a normal rent expense on its income statement.

So, if a company's monthly rent is $100, and it decided to prepay six months of rent, it would record a prepaid rent of $600 on its balance sheet. Each month, the prepaid rent account would be reduced by $100, and a $100 rent expense would be recognized on the company's income statement. This is in contrast to an accrued expense, which would be recorded as a liability on a company's balance sheet, which denotes an obligation to pay the expense at a later date.

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