prepaid expense

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Subhas Parida (Querist)
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10 February 2011 if xyz is a pvt ltd co.,we paid for servicing
and maintenance charges on our computer or software for next one year(1.2.11-31.1.12),what is journal to be passed ,Suppose we paid Rs 10000/- ,what is the journal entry and how is it calculate? ,pls help me

Sunil Kr. Sanganeria

Sunil Kr. Sanganeria (Expert)
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10 February 2011 The journal entry will be as follows:

Repairs & Maintenance A/C Debit Rs.1667
Prepaid expenses A/C Debit Rs.8333
Bank/Cash A/C Credit Rs. 10000

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Subhas Parida

Subhas Parida (Querist)
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07 August 2014 thanks,

Dear sir,

the electricity exp of RS 7000/-for m/o Feb & march 2014 of F.Y-2013-14,bill received on APril 2014,paid the in April 2014 that is F.Y 2014-15,what is the bill to be passed in my books of accounts

thanks in advance.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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10 August 2024 ### **1. Prepaid Expense Journal Entries**

#### **Servicing and Maintenance Charges for Computers/Software**

When you pay for servicing and maintenance charges that cover a future period, this expense is initially recorded as a prepaid expense and then amortized over the period it covers.

**Scenario:**
- **Payment Date:** 1.2.2011
- **Coverage Period:** 1.2.2011 to 31.1.2012
- **Amount Paid:** Rs. 10,000

**Journal Entry at Payment Date (1.2.2011):**

```plaintext
Prepaid Expenses (Asset) Dr. 10,000
To Bank/Cash Cr. 10,000
```

**Explanation:** The amount paid is initially recorded as a prepaid expense, which is an asset because it represents a benefit to be received over the next year.

**Amortization of Prepaid Expense (Monthly):**

To record the amortization of the prepaid expense over the period, you would make a journal entry every month or at the end of the financial year, depending on your accounting policy.

**Monthly Journal Entry (Example for February 2011):**

```plaintext
Expense Account (e.g., Computer Maintenance Expense) Dr. 833.33
To Prepaid Expenses Cr. 833.33
```

**Explanation:** You allocate the prepaid expense amount to the expense account each month. Rs. 10,000 / 12 months = Rs. 833.33 per month.

### **2. Electricity Expense**

When an expense is incurred but paid in a different financial year, it should be accounted for in the period to which it pertains, even if the payment is made in the subsequent year.

**Scenario:**
- **Expense Period:** February & March 2014
- **Bill Received and Paid:** April 2014
- **Amount:** Rs. 7,000

**Journal Entry for Accruing the Expense (in FY 2013-14):**

```plaintext
Electricity Expense Dr. 7,000
To Accrued Expenses/Payables Cr. 7,000
```

**Explanation:** Since the expense pertains to the financial year 2013-14, it should be recorded in that period even though the bill is received and paid in the subsequent financial year.

**Journal Entry for Payment of the Bill (in FY 2014-15):**

```plaintext
Accrued Expenses/Payables Dr. 7,000
To Bank/Cash Cr. 7,000
```

**Explanation:** When the bill is paid, you clear the liability recorded as an accrued expense by making the payment.

### **Summary of Journal Entries**

**For Prepaid Maintenance Charges (1.2.2011):**

1. At the time of payment:
```plaintext
Prepaid Expenses Dr. 10,000
To Bank/Cash Cr. 10,000
```

2. Monthly amortization (example for February 2011):
```plaintext
Computer Maintenance Expense Dr. 833.33
To Prepaid Expenses Cr. 833.33
```

**For Electricity Expense:**

1. Accruing the expense (FY 2013-14):
```plaintext
Electricity Expense Dr. 7,000
To Accrued Expenses/Payables Cr. 7,000
```

2. Payment of the bill (FY 2014-15):
```plaintext
Accrued Expenses/Payables Dr. 7,000
To Bank/Cash Cr. 7,000
```

These entries ensure that expenses are matched to the period they pertain to, adhering to the accrual accounting principle.