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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:

Dr. Prepaid Rent $12,000

  Cr. Cash $12,000

Dr. Rent Expense $1,000

  Cr. Prepaid Rent $1,000

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