Friday, August 7, 2009

Prepaid Expenses and Unearned Revenues

In accounting, prepaid expenses and unearned revenues are considered prepayments by accountants. That is defined as money has exchanged hands but the expense or revenue is not recorded due to the expense has not been incurred yet or the revenue has not been earned yet by the company.

Examples of prepaid expenses and unearned revenues

  • Prepaid Expense - A year long insurance contract a company paid $12,000 for at the beginning of the year. Since the insurance company owes the company service, the expense prepayment is recorded as an asset (Journal Entries: debit Prepaid Insurance and credit Cash).
  • Unearned Revenue - A year long subscription of $12,000 is received in advance by a magazine company. Because the company owes something, the unearned revenue is recorded as a liability (Journal Entries: debit Cash and credit Unearned Revenue).

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