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.

  1. Who benefits the most from prepaid expenses?

    Learn who benefits most when expenses are prepaid. Individuals and businesses often make payments, such as rent or insurance, ... Read Answer >>
  2. Can I use a prepaid credit card to pay bills or transfer money to other accounts?

    Learn how prepaid credit cards enable convenient bill payments and transfers. Explore different fees charged for such transactions. Read Answer >>
  3. How are the three major financial statements related to each other?

    Learn why investors analyze a company's financial statements, and how the income statement, balance sheet and cash flow statement ... Read Answer >>
  4. How do the income statement and balance sheet differ?

    The balance sheet shows a company’s total value while the income statement shows whether a company is generating a profit ... Read Answer >>
  5. What is the difference between a prepaid credit card and a gift card?

    Although prepaid and gift cards are used in the same manner, a prepaid credit card can be used repeatedly, while a gift card ... Read Answer >>
Related Articles
  1. Investing

    The Complete Guide to Real Estate Renting

    Everything you need to know about renting property.
  2. Investing

    10 Cities Where Rent Is Rising Fastest

    Rents are rising in 34 of the 35 largest U.S. metros, but salaries are not keeping pace. Here's where you're most likely to feel the pinch.
  3. IPF - Banking

    How To Find The Right Prepaid Debit Card

    Prepaid debit cards are becoming increasingly popular. Here are some tips for choosing the right prepaid debit card.
  4. Insurance

    Can You Make Money Renting Your Property?

    Current market conditions may make your home a tough sell. It could be time to consider renting your property until a profitable sale is possible.
  5. IPF - Banking

    6 Reasons You Don't Need A Prepaid Debit Card

    We'll look at six situations where a prepaid debit card might seem like a good idea, but it really isn't necessary.
  6. Investing

    Reviewing Assets On The Balance Sheet

    A firm uses its assets to generate sales and bottom-line profits for shareholders. A healthy company will continually grow its assets, which stems from leftover profits that are reinvested back ...
  7. Investing

    Pros and Cons of Renting vs. Owning a Home

    Owning a house might be an appealing idea, but it may have a lasting impact on your lifestyle. Learn more about other implications of rent vs. buying a home.
  8. Insurance

    When Is Rent Guarantee Insurance a Good Idea?

    Prospective renters are turning to rent guarantee insurance to boost their chances of getting approved by a landlord or management company. Is it worth it?
  9. Taxes

    Top 10 Cities to Invest in Rental Properties

    With home ownership out of reach, many Millennials are opting to rent single-family homes, which has created an opportunity for investors.
  1. Prepaid Expense

    A prepaid expense is an asset that arises on a balance sheet ...
  2. Rent Expense

    Rent expense is the cost incurred by a business to utilize property ...
  3. Deferred Charge

    A deferred charge is a prepaid expense for an underlying asset ...
  4. Variable Prepaid Forward Contracts

    Variable prepaid forward contracts are synthetic investment strategies ...
  5. Prepaid Finance Charge

    A prepaid finance charge is an upfront charge associated with ...
  6. Economic Rent

    An excess payment made to or for a factor of production over ...
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center