Prepaid Expenses Vs Accrued Expenses- Major Differences! (Source: Invoicera)
Whether you are a finance student or have simply developed an interest to manage your accounts in business, it becomes crucial to understand the prepaid expenses and accrued expenses are the technical jargons that define a company's Balance sheet. [All kinds of business expenses can be managed well with Expense Management tool] It becomes crucial to realize the difference between these expenses on the basis of: � The timing of the expenses incurred � The financial statements of a company One can easily be confused between prepaid expense vs accrued expense. Hence the difference ​needs to be highlighted in detail, to avoid confusions in the balance sheet of your company.
Prepaid Expenses These expenses are expenses incurred because of payments that have been made in advance. Though expenses are usually recorded as a liability in the balance sheet but these expenses are a slight deviation from the theory because the privileges can be incurred in the future. An example of prepaid expense is an insurance premium. Though insurance payment is an expense but however the prime reason for undertaking an insurance coverage is to receive future benefits from this expense. These expenses are always recorded in the current asset of the balance sheet. Therefore when the insurance premium is paid in full at the beginning of the insurance coverage, the prepaid expense account for insurance is debited and the cash account is credited in the balance sheet.