Prepaid Expense Vs Accrued Expense
Expense management is one of the crucial parts of keeping your business afloat. There will be various kinds of expenses that have to enter into your books. Business owners who manage their finances should understand the difference between prepaid expenses and accrued expenses as it contributes to the balance sheet of their business.
What are Prepaid expenses?
Prepaid expenses are those expenses that are paid in advance before receiving their benefits. Even though expenses are usually recorded as liabilities, Prepaid expenses are recorded as current assets in the balance sheet. These payments will be recognized as expenses once their benefits are received in the future.
Some examples of prepaid expenses include insurance payments, subscriptions, purchase order advances, rent, etc.
What are Accrued Expenses?
Accrued expenses are expenses whose payment is yet to be done even after receiving its benefits. It is recognized as a liability on the balance sheet at first and will be incurred as an expense once the payment is made over time.
Examples of Accrued expenses include vendor payments that have to be done for goods or services that are already purchased, Loans, electricity, etc.
Difference between Prepaid and Accrued Expenses.
The main difference between prepaid and accrued expenses is the time of payment of the expenses paid. For Prepaid expenses, the payment is made before receiving the goods or services whereas for Accrued expenses the payment is yet to be paid after receiving goods or services. Prepaid expenses are considered as assets on the balance sheet whereas accrued expenses are considered as liabilities.
In the Accrual method of accounting, the revenue and expenses should be recorded when they are incurred not when the cash is paid or received. It can be complicated than the cash method of accounting but the accrual method of accounting reveals the company’s financial health more accurately.
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