Prepaid Expenses Explained: How Costs Move Into ExpensesPrepaid Expenses Explained: How Costs Move Into Expenses
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Fatima Akbar
• 9h
A client asked me last week: “Why is there still a balance sitting in prepaid? I already paid all of it.”
Fair question. Honestly, it’s one of the most common things business owners get confused about.
Here’s how I explained it. When you pay your trade licence for the year, that money has left your bank. But you haven’t used the whole year yet. So the unused part isn’t an expense yet. It’s something you’ve paid for and still own, like a credit waiting to be used.
Say you pay 10,350 for a 12 month licence. Each month, 862.50 moves into expenses. Whatever hasn’t been used by 31 December stays on the balance sheet as prepaid.
The client still wasn’t fully getting it from the schedule alone, so I broke it down year by year. 2020, 2021, 2022. Same prepayments, just showing how much was used and how much was still left at each year end.
That’s when it clicked for them.
The visa, shared desk, insurance and licence costs all work the same way. Pay now, use over time, expense a little each month.
If your accountant keeps saying “prepaid” and you nod along, ask them to show you a schedule like this. It’s your money, you should be able to see where it is.
This is part of my contra series, where I explain accounting without the jargon.
#accounting #prepaidexpenses #smallbusiness #UAE
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