Prepaid Expenses Journal, Asset, Expense, and Examples

Expenses are considered incurred when they are used, consumed, utilized or has expired. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

By the end of the month some of the prepaid rent expired, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($11,000). To transfer what expired, Rent Expense was debited for the amount used and Prepaid Rent was credited to reduce the asset by the same amount. Any remaining balance in the Prepaid Rent account is what you have left to use in the future; it continues to be an asset since it is still available. Hence, prepaid insurance journal entry does not affect the total assets because it increases one asset account and decreases another asset account at the same amount. Note that the amount adjusted monthly is the total insurance payment divided by 12 which is the number of months in a year.

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This means that adjustments are needed to reduce the asset account and transfer the consumption of the asset’s cost to an appropriate expense account. The adjusting journal entry for a prepaid expense, however, does affect both a company’s income statement and balance sheet. The adjusting entry on January 31 would result in an expense of $10,000 (rent expense) and a decrease in assets of $10,000 (prepaid rent). “Deferred” means “postponed into the future.” In this case you have purchased something in “bulk” that will last you longer than one month, such as supplies, insurance, rent, or equipment. Rather than recording the item as an expense when you purchase it, you record it as an asset (something of value to the business) since you will not use it all up within a month.

The adjusting entry for rent updates the Prepaid Rent and Rent Expense balances to reflect what you really have at the end of the month. The adjusting entry TRANSFERS $1,000 from Prepaid Rent to Rent Expense. You prepaid a one-year insurance policy during the month and initially recorded it as an asset because it would last for more than one month.

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This is due to, under the accrual basis of accounting, the expense should only be recorded when it occurs. Notice that the ending balance in the asset Accounts Receivable is now $7,600—the prepaid insurance adjusting entry correct amount that the company has a right to receive. The balance in Service Revenues will increase during the year as the account is credited whenever a sales invoice is prepared.