THE MODEL CALCULATES MONTHLY AMORTIZATION FOR PREPAID EXPENSES AND/OR UNEARNED INCOME, GENERATING RELEVANT ACCOUNTING ENTRIES.
Prepaid expenses represent expenditures that have been paid for in advance but have not yet been recorded as an expense. In other words, prepaid expenses are expenditures paid in one accounting period that will be recognized in a later accounting period. Prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time the benefits are realized (the matching principle).
The two most common examples of prepaid expenses are rent and insurance.
Prepaid income is revenue received in advance but not yet earned. Income must be recorded in the accounting period it is earned. Therefore, prepaid income is not shown as income in the accounting period it is received but in the subsequent accounting periods in which the respective services or obligations have been performed.
An entity should therefore recognize a liability in respect of income received in advance until such time as the obligations or services that are due on its part in relation to the prepaid income have been performed.
Examples of income received in advance are rent and commissions received in advance.