Question

Expenses which are paid in advance is termed as _____.

• A. Prepaid expense
• B. Outstanding expense
• C. Unpaid expense
• D. None of the above

Answer 1

The correct option is A Prepaid expense

There are several items of expense which are paid in advance in normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense, is carried forward to the next year and is termed as prepaid expenses. The necessary adjustment in respect of prepaid expenses is made by recording the following entry:

Prepaid Expense A/c Dr.

To Concerned Expense A/c

The effect of the above adjustment entry is that amount of prepaid part is deducted from the total of the particular expense, and the prepaid account is shown on the assets side of the balance sheet.