How does Prepaid Expense work in an Accounting System?

When your company has future operation that require purchases before the plan of operation is executed on the date that occurs in the month.

Putting in the prepaid expense on the balance sheet is the account you want to choose so it does not occurring in the month you purchase on the profit and lost statement.
 
Examples of transaction that would go into prepaid expense is:

• Insurance since you get the total amount of the bill when you finalize the policy you wanted for your company and need to account the cost each month accurately.
  1. How to do it is enter the bill in your accounting system under prepaid expense. This will increase the prepaid account and also increase accounts payable.
  2. If you have the money to pay the bill upfront than is will decrease accounts payable and cash account.
  3. Then each month when you are closing the financial. You will make a journal entry to account for the insurance cost by dividing X amount of dollar you paid for your insurance divided the months of your insurance policy (usually by the month). 
• Events is also a good example of using prepaid insurance since most purchase are made before the event occurring. Some of purchases that would go into prepaid insurance is deposit for the venue, permits, material and supplies, caterers, consultants, etc.

1.  You would want to make the journal entries for the purchase on the month that the event occurs to have an accurate profit and lost statement to show if the events was a success.