What is a prepaid amortization schedule?

Amortization of prepaid expenses is an accounting process that calculates the incremental or periodic cost of a recurring expense that has been paid for in advance and applies the cost back to each of the individual accounting periods that benefit from the payment.

What is an example of a prepaid expense schedule?

What Is an Example of Prepaid Expense Amortization? As an example, if a business prepaid its insurance one year in advance at a cost of $12,000, the expense would be amortized at $1,000 per month. This would be calculated as $12,000 / 12 months = $1,000/month.

How do you record prepaid insurance?

One method for recording a prepaid expense is to record the entire payment in an asset account. For example, assume that on December 1 a company pays an insurance premium of $2,400 for 6 months of liability insurance coverage: On December 1 the company debits Prepaid Insurance for $2,400 and credits Cash for $2,400.

What is the amortization schedule of a prepayment?

Most often, prepaid expenses are amortized using the straight-line method, which evenly spreads the expense over the period of benefit. For example, an amortization schedule for a six-month insurance premium would show one-sixth of the premium being transferred to insurance expense each month for six months.

What is a prepayment schedule?

A prepayment schedule is used to schedule the posting of income or expenditure from an initial value recorded to a Balance Sheet account to be spread over a selected time period (months, quarterly etc.) to appropriate income or expenditure accounts.

How to calculate the amortization schedule?

To calculate amortization, first multiply your principal balance by your interest rate. Next, divide that by 12 months to know your interest fee for your current month. Finally, subtract that interest fee from your total monthly payment. What remains is how much will go toward principal for that month.

Can prepayments be amortized?

Amortization of prepaid expenses helps to ensure that a company's financial statements are accurate and in compliance with accounting principles and standards, such as Generally Accepted Accounting Principles (GAAP).

How to make an adjusting entry for prepaid insurance?

To recognize prepaid expenses that become actual expenses, use adjusting entries. As you use the prepaid item, decrease your Prepaid Expense account and increase your actual Expense account. To do this, debit your Expense account and credit your Prepaid Expense account. This creates a prepaid expense adjusting entry.

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