Saturday Brain Storming Thought (184) 12/08/2023
PREPAID ASSETS
A Prepaid Asset is a financial resource that a business has paid for in full, although the full benefit of that resource will not be used until a future date
A Prepaid Asset can also be expressed as an expense that has been paid for that will not be consumed until a later time
Prepaid Asset Value
A Prepaid Asset is considered an Asset because it has economic value to the business
An Asset is any resource that has monetary value
A Prepaid Asset has economic value to the business because of its future benefits
Utilisation of Prepaid Asset
Prepaid Asset are similar to deferred expenses
1) A Prepaid Asset is consumed in one year or less, so it is considered a current asset
2) a deferred expense applies to an expense that is not consumed within one year, so it is considered a long-term asset
Examples of Prepaid Asset
Prepaid Assets typically refer to administrative expenses
1) rent or lease
2) legal retainers
3) estimated taxes
4) other recurring expense
5) property insurance
6) mortgage interest
7) prepaid salaries/wages
8) other prepaid utilities
Prepaid Asset recording
Prepaid assets are recorded as an asset for the full amount of the payment
The asset will be reduced in subsequent accounting periods in an amount equal to what the monthly payment would have given
A Prepaid Asset will be recorded in its journal entry as a debit in the asset account and a credit in the cash account
Prepaid Assets are not liquid assets
Other current assets, such as Prepaid expenses and income tax receivables, cannot be sold for cash, which is why prepaid assets are not considered as liquid assets
Accrued Expense
An accounting term that refers to an expense that is recognised on the books before it has been paid
Prepaid expense is an asset
This is because it isan amount paid in advance for goods and services that will be provide economic benefits in the future
Calculations involved in Prepaid Asset
1) a business must calculate the monthly expense for a prepaid asset
2) business will divide the total value of the asset by the number of months it will last
3) this is expressed in equation form as
Monthly Expense = (Total Value) / (number of months)
Matching principle in Prepaid Asset
The matching principle is the basis for allocating expenses to the periods in which they are used or consumed
It requires that expenses be matched with the revenues they help generate
Difference between prepaid assets and deferred revenue
Prepaid Assets represent the right to receive future services
Deferred revenue represents the right to receive future cash payments
Expiration of Prepaid Asset
When a prepaid asset expires,
The asset is reduced in value by the amount of benefits that were used or consumed
The expense account associated with the prepaid asset is also increased by the same amount
Prepaid Asset valuation
1) by eliminating future expenses, a prepaid asset benefits accounting periods in the future
2) in contrast, a typical expense is recorded in the accounting period when it is incurred
3) it does not benefit future accounting periods, therefore it has no value and is not considered an asset
Prepaid assets are valued on the balance sheet at cost less expired portion
Prepaid Assets in Accural Accounting
A Prepaid Asset is an expenditure of money in advance of when money is due
Under accural accounting, you convert part of your prepaid assets to actual expenses monthly
Prepaid Asset Manipulation
1) prepaid assets normally involve relatively small amounts
2) this can create the temptation to create large prepaid assets even when not justified
3) for example, you might prepay a vendor for items you won’t order until several months later
4) you might illegimately claim a large current maintenance expense as a prepaid asset
5) to avoid these sort of problems, set a minimum amount for a prepaid asset, recommends accounting coach
Entering information about prepaid asset
1) description of prepaid asset
2) total amount of current year amortization for book purpose
3) asset category
4) payee
5) any beginning balances of prepaid assets (prior year prepaid assets)
6) number of months remaining for beginning balances
7) month of payment for current year payments
8) total amount
9) down payment
10) number of months the payment covers
11) number of months of coverage in current tax year
Compiled by:
Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer
