Question

Please explain the following statement: “An asset is just an expense waiting to happen”. Give an example.

Answer 1

An asset is just an expense waiting to happened, example Prepaid Expenses

The statement is try to explain the matching and accrual principle of accouting ie matching the income or expense to the time period in which it is earned or incurred.

For example Prepaid rent you paid rent expense in advance, so rather than recognize the whole rent expense right now, you will capitalized it as an asset (prepaid rent) as per accrual and matching principle to recognize expense This asset will amortised and recognise as expense to future year when it inccure say suppose 5 year prepaid hence will be recognize over 5 year by passing entry by debiting Rent expense and crediting Prepaid Rent. Thus, the rent expense will be recognized each year when it is actually incurred.