How to Book Prepaid Expense Amortization Journal Entry

Prepaid expenses are costs that have been paid in advance for goods or services that will be received in the future. Prepaid expenses are recorded as assets on the balance sheet until they are used or consumed. When the prepaid expense is used or consumed, it is then recorded as an expense on the income statement.

For example, if a company pays $3,000 for a one-year insurance policy, the journal entry to record the initial prepaid expense would be as follows:

Debit: Prepaid Insurance $3,000
Credit: Cash $3,000

The company would then record a journal entry each month to spread the cost of the insurance policy over the 12-month period. The journal entry would be as follows:

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Debit: Insurance Expense $250
Credit: Prepaid Insurance $250