Prepaid expenses are eventually expected to

Prepaid expenses are eventually expected to

a. become revenues when services are performed.

b. become expenses in the period when they are paid.

c. become revenues when the liability is no longer owed.

d. become expenses when their future economic value expires.

Answer: d. become expenses when their future economic value expires.

Prepaid expenses are expenses which are paid in advance for the goods or services that the company will utilize in the future. They are future economic benefits which the company has already acquired but not consumed or capitalised and hence not written off as an expense. Prepaid expenses are reported under the assets section of the company’s balance sheet at the time of their purchase.

Prepaid expenses are recorded as assets in the company’s balance sheet but are expensed out gradually in the income statement as the company receives the goods or services. This occurs when the future economic benefit of the prepaid expense expires: the goods or services used in that given accounting period. At that point, the relevant portion of the prepaid expense is shifted from an asset to an expense account, so that revenues and expenditures are reported accurately for that period.