What are prepaid expenses and deferred income?

Prepaid expenses and deferred income ensure that income and expenses are recorded in the correct accounting period. Prepaid expenses and deferred income are closing entries that ensure allocation to the correct period.

Prepaid expenses (ARA) appear on the assets side of the balance sheet and relate to expenses paid in advance for the new year or income not yet received from the old year, such as prepaid rent or services invoiced later.

Accrued expenses (PRA) are shown on the liabilities side and record expenses that still belong to the old year but will only be invoiced later, or income that has already been received but will only be paid in the new year, such as advance payments from customers.