prepaid expenses

Hi Kaya

Prepaid exp means expenses incurred in current year and the benefit of which is expected to arise in future.

1) So in the first case, Renewal fees which is not related to current year is prepaid expense .

2)Same rule applies in the second case , BUT  considering the materiality concept it is advisable  to  charge the whole expense relating to Uniform to current  year.

Expecting feedbacks. Thank you

 agree with hattric-----consider materiality concept

both are prepaid expenses

 FIRST IS PREPAID EXPENSE BUT SECOND ONE IS NOT

In first case definately it is prepaid expense. In second case if the company supplies uniform every two year then it has to be treated as prepaid expense. However where a company supplies uniform depending on requirement of employee and not on time basis then it may charged to P&L a\c in the same year.

In respect of prepaid expense , act say whatever expenditure incurred in current year  whose benefit extends to a year or more is to be classified as prepaid to the extent benfit relates to next year or so . IN CASE OF DIGITAL SIGNATURE  whose benefit extends to two year can be classified as prepaid on the basis of period which relates.However same is not the case with uniform clothes  supplied to staff for two year , than whole expenses is booked in current year.

Basis for quantification

Situation 1. where the company supplies uniform on periodic basis, then total expenses incurred will be divided by no. of  years.

Situation 2. where the company supplies uniform on adhoc basis as and when required by the employee, then entire expenditure will be charged to P&L a\c.

 The scope of Prepaid Expenses already explained above.   The prepaid expenses are treated with Statutory Auditors with below points.

1. Materiality - Based on Management.

2. Company Policy.

Prepaid Expenses may inclusive of

1. Ex. Prepaid Rent and Insurance.

Note : If you treat prepaid expenses,  you will have to amortize as on when the benefit is availed.  But CANNOT be expense it off in current year.

So, Case No. 1 can be treated as Prepaid expenses based on materiality level - The expenses has to hit P&L in respective years.

Case No. 2 -  Normally, no person (as per IT Act) will be treating this as prepaid expenses.  But still, If Management decides, it can be.

Really i m very delighting after reading this discussin,it's very useful like us student and also it is nice to see that how everyone here is helping to each other on one platform.

     simple and best explaination given by hattrick, answer given by hattrick is absolutely precise.

               regards and   thanks to all   ( kaya plz continue with such discussion)

hi kaya,

first one is definately a prepaid expense.

but as far as uniform is concerned, the uniforms quality and the useful life can not be ascertained. in my opinion the unform can not be treated as a prepaid expense.

Hi Kaya;

In the 1st case, 100% there is an prepaid expenses;

And in second case you can treat it as "Deferred expenses" in your assets, and write off the part of total amount on monthly or yearly basis.

Thanks.

It should not be capitalized because each individual item doesn't exceeds 5000rs . An there is no benefit coming to the company. So what total expense should be charged to p& L account this year

i agree