PREPAID VS DEFERRED EXPENSE

DEFINITION

Prepaid (Shows under current asset)

Prepaid expenses represent expenditures that a company has not yet been recorded as an expense but paid for in advance.

Deferred (Shows under Long term asset)

A deferred expense is a cost that has already been incurred, but which has not yet been consumed. The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is charged to expense.

EXAMPLES

Prepaid (For within a financial year)

• Rent
• Insurance
• Utility bills
• Interest expense

Deferred (For more than one financial year)

• Depreciation
• Insurance paid in advance
• Startup or Registration cost

JOURNAL ENTRIES

Rent paid for two months

Landlord                                      Dr      2000

Cash                                                                      2000

                

Prepaid Rent                                Dr       2000

Landlord                                                                    2000

At the end of the month and next month

Rent                                               Dr      2000

Prepaid Rent                                                              2000