What is a prepaid account?
submitted by radeza mangulabnan

igbb

A prepaid account tracks expenses that will be made in the future. Example: You have a $1000 monthly premium for insurance. At the beginning of the year you credit Cash $1,200 and debit Prepaid Insurance $1,200. Now that money is set aside to make monthly payments. At the end of each month you credit Prepaid Insurance $1,000 and debit Insurance expense $1,000. This approach helps you recognize expenses before they're made.

devin

@igbb
You said prepaid insurance gets $1,200 for a $1,000 premium. I'm guessing the extra $200 is just for a buffer?

igbb

@devin
Yes, though many companies would prefer to have the exact amount in the prepaid account, and then account for additional expenses later. If there was a late fee or fee hike a little extra money in the account would help. If you don't end up using it, it can be rolled over into a prepaid account the next year.

Rohit

Pls explain prepaid expenses ??

Josh

Rohit, a prepaid expense an expense you pay in advance. This lowers the chances of missing a payment. Sometimes companies pay rent months ahead of the due date. This can help keep things tidy. However, the longer you have possession of your money, the more you can do with it (like investing).