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When is an expense really an asset?

11/29/2016

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Here at Color Accounting we like to underscore the fact that it is often the words used in accounting - not the numbers - that create the most confusion.

Different words are used to express the same concept - or a single word can take on different meanings depending upon the context.
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Often, the confusing word in question is a noun - a name.

In today's example, the word that creates the confusion is an adjective, and that adjective is "pre-paid."

When you pre-pay expenses - such as paying for a year's cleaning service in advance - you are actually creating an asset on your Balance Sheet, called something like "Pre-Paid Cleaning Services."

The expense is reflected on your income statement when the cleaning actually happens. And at that time, the Pre-Paid Cleaning asset decreases.

So, a pre-paid expense is not an expense… it’s an asset. And the language of business is full of such language paradoxes.

Regards, Peter
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    Co-founder Peter Frampton is the lead author of this blog.

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