Note: One month corresponds to $2,000 ($24,000 x 1/12) in insurance policy. Therefore, prepaid insurance must be adjusted: The company pays $24,000 in cash upfront for a 12-month insurance policy for the warehouse.Īt the end of one month, Company A would have used up one month of its insurance policy. Upon signing the one-year lease agreement for the warehouse, the company also purchases insurance for the warehouse. The adjusting journal entry is done each month, and at the end of the year, when the lease agreement has no future economic benefits, the prepaid rent balance would be 0. Therefore, prepaid rent must be adjusted: The initial journal entry for Company A would be as follows:Īt the end of one month, Company A would’ve used up one month of its lease agreement. The landlord requires that Company A pays the annual amount ($120,000) upfront at the beginning of the year. We will look at two examples of prepaid expenses: Example #1Ĭompany A signs a one-year lease on a warehouse for $10,000 a month. Initial journal entry for prepaid insurance:Īdjusting journal entry as the prepaid insurance expires: Prepaid insurance is insurance paid in advance and that has not yet expired on the date of the balance sheet.

The journal entries for prepaid rent are as follows:Īdjusting journal entry as the prepaid rent expires:Ģ. Prepaid rent is rent paid in advance of the rental period. The two most common uses of prepaid expenses are rent and insurance.ġ. The most common types of prepaid expenses are prepaid rent and prepaid insurance.As the benefits of the expenses are recognized, the related asset account is decreased and expensed.

Prepaid expenses are future expenses that are paid in advance and hence recognized initially as an asset.

Prepaid expenses balance sheet