Prepaid...what?

Since it is summer, I thought I'd tackle a simpler subject: prepaid expenses.

You're probably thinking... prepaid what? 

Prepaid expenses are a special type of expenses that are actually considered asset at the end of the day.  Let me explain:

Assume that today you've paid $1000 of rent for the month of September.  Since today is August 14th, you've actually paid the rent in advance.  Although you've already paid the cash, you haven't actually "used up" this rent expense since it relates to the month of September.

How would we record this?
Think about it this way:  we paid $1000, so cash has decreased.  At the same time, we have prepaid the rent for next month.  Therefore, we now have an asset - prepaid rent!  

The entry would then be as follows:
DR Prepaid Rent (+ Asset)         1000
     CR Cash (- Asset)                      1000

Come September, our Prepaid Rent account would then be drawn down since we actually "used up" this expense.  

Our journal entry at the end of September would then be:
DR Rent Expense (+ Expense)     1000
     CR Prepaid Rent (- Asset)            1000

What do we have left in our prepaid account?
Our prepaid account is now zero (1000 - 1000 = 0)

As time passes, our prepaid expense moved from an asset account on the balance sheet, to an expense account on the income statement.