A prepaid expense occurs when a company pays in advance for a service or goods for which the benefit extends beyond the current accounting period True False
Question
A prepaid expense occurs when a company pays in advance for a service or goods for which the benefit extends beyond the current accounting period
True
False
Solution
Answer
The statement is True.
A prepaid expense is defined as a payment made for goods or services that are to be received in the future, meaning the benefit of the service or goods will extend beyond the current accounting period. For example, if a company pays a yearly insurance premium at the beginning of the fiscal year, it recognizes this payment as a prepaid expense, as the coverage will benefit the company over the course of the entire year, and thus affects multiple accounting periods. Prepaid expenses are initially recorded as assets on the balance sheet and are subsequently expensed over time as they are consumed or utilized.
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