Any statement representing your products or services should be true, accurate and able to be substantiated. There are fines for businesses that mislead consumers. It does not matter whether a false or misleading statement was intentional or not. It is illegal for a business to make statements that are incorrect or likely to create a false impression. This includes advertisements or statements in any media (print, radio, television, social media and online) or on product packaging, and any statement made by a person representing your business. For example, your business must not make false or misleading claims about the quality, value, price, age or benefits of goods or services, or any associated guarantee or warranty. Using false testimonials or ‘passing off’ (impersonating another business) is also illegal. When assessing whether conduct is likely to mislead or deceive, consider whether the overall impression created by the conduct is false or inaccurate. Businesses can't rely on small print and disclaimers as an excuse for a misleading overall message. For example, an advertisement states that a product is ‘free’ but the fine print indicates some payment must be made. If your business needs to qualify its advertisements, make sure the qualifying statements are clear and prominent so that consumers know what the real offer is. Comparative advertisingComparative advertising may be used to promote the superiority of your products or services over competitors as long as it is accurate. The comparison may relate to factors such as price, quality, range or volume. Bait advertisingBait advertising is the illegal practice of advertising specific prices (usually special ‘sale’ prices) on goods that are not available or are available only in very limited quantities (where this limit is not clearly and specifically disclosed). You should only offer goods or services at a ‘special price’ if they are available in reasonable quantities for a reasonable period, unless you state clearly that the good is in short supply or on sale for a limited time. Country of originIt is illegal under the Australian Consumer Law to make false or misleading claims about the country of origin of goods. See: Country of origin claims Premium (or credence) claimsPremium claims may suggest a product is safer (‘non-toxic’), offers a moral or social benefit (‘free range eggs’) or a nutritional benefit (‘fat free’). The benefit may also be 'green' or environmental (‘100% recyclable’) or therapeutic (‘the fastest pain reliever’). A premium claim may also promote a product as being of a perceived quality (‘Swiss chocolate’ or ‘Belgian beer’). Claims that give the impression that a product, or one of its attributes, has some kind of added benefit when compared to similar products and services can be made as long as the claims are not misleading and can be substantiated. If your business gives away free items or prizes as a promotional activity, you must not mislead your audience about the items on offer or the chances of receiving these items. If there is a catch (for example, if people must meet certain conditions to claim a prize), you must let people know at the outset. Contact your local consumer protection agency to check if there are any legal requirements under state/territory laws. ‘Puffery’ is a term used to describe wildly exaggerated or vague claims about a product or service that no one could possibly treat seriously. For example, a restaurant claims they have the ‘best steaks on earth’. These types of statements are not considered misleading. When presenting information about products or services to customers, be sure to:
Do not:
Advertising and selling Country of origin claims and the Australian Consumer Law Green marketing and the Australian Consumer Law A guide for egg producers
A prepaid expense is a type of asset on the balance sheet that results from a business making advanced payments for goods or services to be received in the future. Prepaid expenses are initially recorded as assets, but their value is expensed over time onto the income statement. Unlike conventional expenses, the business will receive something of value from the prepaid expense over the course of several accounting periods. Companies make prepayments for goods or services such as leased office equipment or insurance coverage that provide continual benefits over time. Goods or services of this nature cannot be expensed immediately because the expense would not line up with the benefit incurred over time from using the asset. According to generally accepted accounting principles (GAAP), expenses should be recorded in the same accounting period as the benefit generated from the related asset. For example, if a large copying machine is leased by a company for a period of 12 months, the company benefits from its use over the full time period. Recording an advanced payment made for the lease as an expense in the first month would not adequately match expenses with revenues generated from its use. Therefore, it should be recorded as a prepaid expense and allocated out to expense over the full twelve months. Journal entries that recognize expenses related to previously recorded prepaids are called adjusting entries. They do not record new business transactions but simply adjust previously recorded transactions. Adjusting entries for prepaid expenses are necessary to ensure that expenses are recognized in the period in which they are incurred. Due to the nature of certain goods and services, prepaid expenses will always exist. For example, insurance is a prepaid expense because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens in the future. Clearly, no insurance company would sell insurance that covers an unfortunate event after the fact, so insurance expenses must be prepaid by businesses. For example, assume ABC Company purchases insurance for the upcoming 12 month period. It pays $120,000 upfront for the insurance policy. ABC Company will initially book the full $120,000 as a debit to prepaid insurance, an asset on the balance sheet, and a credit to cash. Each month, an adjusting entry will be made to expense $10,000 (1/12 of the prepaid amount) to the income statement through a credit to prepaid insurance and a debit to insurance expense. In the 12th month, the final $10,000 will be fully expensed and the prepaid account will be zero.
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Prepaid expenses are payments made for goods or services that will be received in the future. Prepaid expenses are not recorded on an income statement initially. Instead, prepaid expenses are first recorded on the balance sheet; then, as the benefit of the prepaid expense is realized, or as the expense is incurred, it is recognized on the income statement.
When a company prepays for an expense, it is recognized as a prepaid asset on the balance sheet, with a simultaneous entry being recorded that reduces the company's cash (or payment account) by the same amount. Most prepaid expenses appear on the balance sheet as a current asset unless the expense is not to be incurred until after 12 months, which is rare.
Businesses cannot claim a deduction in the current year for prepaid expenses for future years. Then, when the expense is incurred, the prepaid expense account is reduced by the amount of the expense, and the expense is recognized on the company's income statement in the period when it was incurred. One of the more common forms of prepaid expenses is insurance, which is usually paid in advance. For example, Company ABC pays a $12,000 premium for directors and officers liability insurance for the upcoming year. The company pays for the policy upfront and then, each month, makes an adjusting entry to account for the insurance expense incurred. The initial entry, where we debit the prepaid expense account and credit the account used to pay for the expense, would look like this: Then, after a month, the company makes an adjusting entry for the insurance used. The company makes a debit to the appropriate expense account and credits the prepaid expense account to reduce the asset value. The monthly adjustment for Company ABC would be $12,000 divided by 12 months, or $1,000 a month. The adjusting entry at the end of each month would appear as follows: Businesses may prepay rent for months in advance to get a discount, or perhaps the landlord requires a prepayment given the renter’s credit. Either way, let’s say Company XYZ is prepaying for office space for six months in advance, totaling $24,000. The initial entry is as follows: Then, as each month ends, the prepaid rent balance sheet account is reduced by the monthly rent amount, which is $4,000 per month ($24,000/6 months). At the same time, the company recognizes a rental expense of $4,000 on the income statement. Thus, the monthly adjusting entry would appear as follows: Additional expenses that a company might prepay for include interest and taxes. Interest paid in advance may arise as a company makes a payment ahead of the due date. Meanwhile, some companies pay taxes before they are due, such as an estimated tax payment based on what might come due in the future. Other less common prepaid expenses might include equipment rental or utilities. As an example, consider Company Build Inc. which has rented a piece of equipment for a construction job. The company paid $1,000 on April 1, 2019, to rent a piece of equipment for a job that will be done in a month. The company would recognize the initial transaction as follows: Then, when the equipment is used and the actual expense is incurred, the company would make the following entry to reduce the prepaid asset account and have the rental expense appear on the income statement: Regardless of whether it’s insurance, rent, utilities, or any other expense that’s paid in advance, it should be recorded in the appropriate prepaid asset account. Then, at the end of each period, or when the expense is incurred, an adjusting entry should be made to reduce the prepaid asset account and recognize (credit) the appropriate income expense, which will then appear on the income statement. Prepaid expenses aren’t included in the income statement per Generally Accepted Accounting Principles (GAAP). In particular, the GAAP matching principle requires accrual accounting, which stipulates that revenue and expenses must be reported in the same period as incurred no matter when cash or money exchanges hands. That is, expenses should be recorded when incurred. Thus, prepaid expenses aren’t recognized on the income statement when paid because they have yet to be incurred.
Prepaid expenses are recorded as assets on the balance sheet. Once realized, the expense is recorded on the income statement.
Prepaid expenses are classified as assets as they represent goods and services that will be consumed, typically within a year.
The 12-month rule allows taxpayers to deduct prepaid expenses in the current year if the asset does not go beyond 12 months from the date of the payment or the end of the tax year following the year in which the payment was made.
At times, payments are made for future benefits. In accounting, these payments or prepaid expenses are recorded as assets on the balance sheet. Once incurred, the asset account is reduced, and the expense is recorded on the income statement. The GAAP matching principle, however, prevents these expenses from being recorded on the income statement before the asset is realized. |