Barrie Bookkeepers Inc

What is prepaid?

In accounting it is important to show the income and expenses in the periods or months that they apply to. Some purchases only send a bill once a year. If the bill is recorded as an expense in just one month it overstates the expenses for that one month. The other eleven months expenses are then understated. To even out the twelve months an account called Prepaid is used. When the bill is received it is entered to prepaid. By dividing the total bill by the number of months it covers, a monthly cost is determined. Each month this monthly cost is recorded as the expense portion and the prepaid account reduces by the same amount.