An organization's current assets are its liquid assets as the date the balance sheet was created. Here, businesses utilize some pretty conventional accounts to track resources they anticipate receiving or utilizing during the next 12 months.

Pre-paid costs are part of this category of liquid assets. Cash and other liquid assets, account receivable, and inventories are examples of current assets. Let's discuss prepaid expenses, current assets, and the role of other current assets on the balance sheet.

What Are Pre-paid Expenses?

In the case of a Pre-paid Expense, the firm has paid in advance for an item or service that it plans to utilize during the next year. A corporation has prepaid for this expenditure, which means it will be incurred in the future. Income statement entries for prepaid expenses are not made until the related goods or services are used by the business.

A business may spread out the use of prepaid costs across several accounting periods. There will be a string of costs stemming from this. The prepayment of rent or insurance premiums is an example of an upfront cost.

In exchange for rent, the firm is granted use of the premises for the specified time frame. The accounting treatment of an expense as a current asset until it is paid in full may be found on the balance sheet.

Consumption of asset results in its removal from the balance sheet and its subsequent treatment as an operating expenditure through retained profits in the income statement. Prepaid expenses are classified as long-term or non-current assets if not used within a year after being paid for.

Pre-paid Expenses And Financial Statements

A company's financial results are unaffected by the initial journal entry for a prepaid cost because the expense has already been paid. For example, the first item in the journal for prepaid rent would be a debit to the prepaid rent account and a credit to the cash account.

These accounts are assets, and their total value does not affect the Company's balance sheet. You may recall that prepaid costs are seen as an asset by the firm since they provide the possibility of future financial rewards to the business. Nevertheless, adjusting a journal entry for a prepaid cost impacts the income statement and the corporation's balance sheet.

What Is A Current Asset?

A current asset is a short-term asset that a corporation anticipates using up, converting into cash, or selling within one fiscal year or operational cycle. Current assets are also frequently referred to as liquid assets. On the other hand, non-current assets are long-term assets that cannot be conveniently turned into cash within one year.

A balance sheet is a financial record that shows a company's financial health at a specific time. It is important to have a solid understanding of the various types of assets since this dictates how they are represented on the balance sheet.

The asset section, the liability section, and the equity section make up the balance sheet. As a result of the fact that balance sheets are structured according to the order of liquidity and that current assets are the most liquid assets, current assets are listed first under assets.

Current Assets On A Balance Sheet

Inventory

Your inventory includes the finished items, works-in-progress, raw materials, and supplies on your balance sheet. Inventory also includes the things that you sell. On the other hand, not every item in inventory qualifies as a current asset. If you anticipate keeping some inventory items for longer than a year, you should consider them non-current assets and report them as such on your balance sheet.

Accounts Receivable

Accounts receivable are any delinquent debts or unpaid bills of exchange incurred by your Company. It refers to the sum of money that clients or customers owe you for goods or services you have already given but have not yet been paid for.

Marketable

Investments that are considered marketable are capable of being quickly turned into cash and traded on public markets. It is true, for instance, of cryptocurrencies and other marketable assets and short-term investments that are simple to liquidate.

Cash And Cash Equivalents

The concept of cash is straightforward. It is the total quantity of cash that you have in your possession at any time. On the other hand, cash equivalents are denoted by short-term savings bonds, short-term investments, and foreign currencies that can be readily changed into cash.

Pre-paid Expenses

Costs that have already been paid for but will provide benefits in the future are examples of prepaid expenses. You have prepaid expenditures if you have paid for a lease for an entire year or an insurance policy that covers a longer period. Include these in the income statement for your business for the period covered by the payment.

Other Current Assets

Other current assets include company-owned assets that may be converted to cash within one year but cannot be classed under the abovementioned categories. Other current assets include any assets that can be converted to cash without incurring fees. In most cases, specific information on the Company's other assets may be found in the notes that accompany the financial statements.

Conclusion:

The purchase is considered a prepaid expense when an asset is purchased in one accounting period but used in another. It is assumed that current assets will be used up, sold, or transformed into cash within a year or the business cycle, whichever comes first.

Once your current assets have been recorded in the manner described above on your balance sheet, you can easily determine how much cash you have on hand. Payments are sometimes paid in anticipation of some future reward. Pre-paid costs and payments are treated as assets in accounting.