Prepaid Expenses

B

Prepaid expenses occur when you pay for a service before you actually receive the benefits of the service.

Prepaid expenses refer to payments made in advance for goods or services that will be received or consumed in the future. These expenses are initially recorded as assets on the balance sheet because they represent a future benefit to the company.

Out of the given options, the correct answer is B. Prepaid expenses are advance payments for goods or services that extend beyond the current accounting period. This means that the benefits of the prepaid expenses will be realized over a period of time that extends beyond the current reporting period. For example, if a company pays for a one-year insurance policy in advance, the expense is recorded as a prepaid expense because the insurance coverage will be received over the course of the year.

Option A is incorrect. Prepaid expenses are not classified as current liabilities on the balance sheet. Liabilities are obligations that a company owes to external parties, whereas prepaid expenses represent assets that will be used or consumed by the company.

Option C is also incorrect. Prepaid expenses are included in the calculation of a company's working capital. Working capital is a measure of a company's short-term liquidity and is calculated by subtracting current liabilities from current assets. Prepaid expenses are considered current assets because they will be used or consumed within one year or the operating cycle, whichever is longer.

Option D is incorrect. Prepaid expenses are not advance payments for work that the company has not yet performed. Instead, they represent advance payments for goods or services that will be received or consumed by the company in the future. The work associated with the prepaid expenses may have already been performed by the other party, such as the payment for a future period's rent or insurance coverage.

In summary, prepaid expenses are advance payments made by a company for goods or services that extend beyond the current accounting period. They are recorded as assets on the balance sheet and are included in the calculation of a company's working capital.