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Initially a prepayment for items such as rent or insurance are recorded as assets and later are recorded as a in the period the benefit expires.
What Justifies Prepaid Expenses as Assets?
Because they are payments made in advance by a company in exchange for future delivery of products or services, prepaid expenses are seen as current assets. Typically, prepaid expenses involve the acquisition of an item that will benefit the organization over a number of accounting periods, such as rent or insurance (often six months or a year). Due to the fact that it indicates a future benefit owed to the company, the business records prepaid expenses as assets on the balance sheet. Amounts are expensed to the income statement as the asset's value declines over time as the benefits of the good or service are realized.
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