As we discussed in our fundamentals and disbursements modules, prepaid assets exist when an expense is paid in advance:

Rent

Insurance

At the end-of the month, the portion of the expense that was utilized in the month must be recognized as an expense and the asset reduced

Qs: What is a prepaid asset?

Qs: Using the asset criteria, why is it an asset?

Go through bullet 1

Qs: At the end of the month, what do we need to do with regards to prepaid assets?

Go through bullet 2

Test your knowledge

1)What is the journal entry to record the use of a prepaid expense at the end of the month?

2)A company purchased vehicle insurance for 320,000 on June 15, 2022 for a one-year term. How much expense will be recognized in the month of December 2022 and what is the remaining prepaid balance at December 31, 2022?

ASK a couple students to answer each, to check for differing answers

Answers:

1)Debit expense / Credit asset

2)320,000 / 12 = 26,667

End of December 31: 146,667 left (173,333 was depreciated for 6.5 months)

These calculations are done in a prepaid assets register, which include these details:

Date paid

Description of expense paid

Total amount paid

Period over which the expense will be used

Once the journal entries are posted, the TB must be reconciled to the prepaid expenses register

As a junior accountant, you may be responsible for the calculation and the posting of the expense entries. You will need to understand the prepaid register and each type of prepaid expense your company typically has.