Question

What is a prepaid expense? Give three examples of prepaid expense items.

Answer 1

Prepaid expense are expense that are paid in advance but not yet accrued. In other words prepaid expense is not an expense yet because the business has not incurred that expense, only the cash used to settle expense are paid before the incurrence of expense. For example prepaid insurance. The expense for insurance is paid when insurance policy is taken and generally an years's insurance is paid in advance. This insurance is charged as expense every month when the insurance expires.

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Example of prepaid expense include

1 Prepaid Insurance

2 Prepaid rent

3 Prepaid salary

4 Prepaid interest on bank loan. etc