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Prepaid Expense
Prepaid Expenses are payments for assets that will not be
used until later. An example is Prepaid Rent. Consider a company that
pays its 12 months' rent in advance of $12,000. According to the matching
cost principle, costs should only be recognized when they benefit the
company in the current period. Therefore, this $12,000 will benefit the
company over a period of 12 months, and will sit on the balance sheet
as an asset account. After each month it is used, the following entry
will be done to recognize the expense:
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