What is an example of a prepaid expense?

What is an example of a prepaid expense?

• A. Insurance and office rent.
• B. Equipment.
• C. Accounts receivable.
• D. Marketable securities.

Answer: (A)

A prepaid expense is a payment made before the related service or benefit is received, and it is recorded as a current asset until that benefit is used. Insurance and office rent fit this, because paying for a policy or rent in advance creates a prepaid asset (prepaid insurance or prepaid rent) that is gradually expensed over the periods covered by the payment. The other items aren’t prepaid expenses: equipment is a long-term asset acquired for use, accounts receivable is money owed to the company, and marketable securities are investments.

A prepaid expense is a payment made before the related service or benefit is received, and it is recorded as a current asset until that benefit is used. Insurance and office rent fit this, because paying for a policy or rent in advance creates a prepaid asset (prepaid insurance or prepaid rent) that is gradually expensed over the periods covered by the payment. The other items aren’t prepaid expenses: equipment is a long-term asset acquired for use, accounts receivable is money owed to the company, and marketable securities are investments.