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PREPAID EXPENSES OR EXPENSES PAID IN ADVANCE OR EXPENSES RELATING TO THE NEXT OR FOLLOWING YEAR OR UNEXPIRED EXPENSES

There are certain expenses which may have been paid in advance, i.e., expenses for the next year have been paid during the current year. For example, insurance premium ofRs. 2,400 was paid on April 1, 2002 for the whole year. The accounting period ends on 31st December, 2002 but insurance premium has been paid up to 31st March. 2003. The period between Jan. 1 to March 31, 2003 belongs to the next year. It means that insurance premium paid for the 3 months of the next year is prepaid, i.e., l/4th of $ 2,400 or $ 600 has been paid for the year 2003. We will have to pass an adjusting entry for prepaid insurance as under:

Treatment in the Final Accounts

(i) If prepaid expenses appear in adjustments. Prepaid insurance show a debit balance, so it will be shown at the assets side of Balance sheet. The amount of prepaid insurance will be deducted from insurance at the debit side of profit and loss account.

Prepaid expenses are also known as unexpired expenses, because the part of expenses relating to the current year have expired (benefit from the expenditure has been availed of). The part of expenditure relating to next year is still unexpired, i.e., the benefit of the expenditure is to be availed of. Let us take an example. Rent for the whole year amounting $ 12,000 has been paid on 1st May, 2004. The rent for eight months (May I-Dee. 31) relates to the current year 2004, and the rest rent for four months, i.e., (from Jan. 1 to April 30, 2005) are concerned with the next year. $ 4,000, the rent for four months is unexpired or the benefits of this rent are to be availed of, so it is an asset. The current year should bear only $ 8,000 for rent, $ 4,000 will be deducted from the rent, i.e., $ 12,000 at the debit side of profit and loss account. It will be shown in the profit and loss account and Balance sheet as under :

Profit and Loss Account                                                                   Balance Sheet 

(ii) If prepaid expenses appear in Trial balance. Sometimes items like unexpired rent or prepaid insurance may be given in the Trial balance. In such case, unexpired rent and prepaid expenses will be shown at the assets side only.