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.
Different words are used to express the same concept - or a single word can take on different meanings depending upon the context.
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
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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