Page 58 - Finance for Non-Financial Managers

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The Balance Sheet
paid again. Thus, in a
sneaky way they create
Amounts that are paid in
cash by enabling the com- Prepaid expenses 39
advance to a vendor or
pany to avoid paying out creditor for goods and services.
that amount during the Because the payments are to obtain
next 12 months. OK, so benefits for the organization over a
period of time, the cost of these
that’s a stretch, but that’s
assets is charged against profits
how it works—honest.
throughout the period, usually on a
Let me give you an
monthly basis. Prepaid expenses is a
example. Every company current asset, because the company
buys insurance of various has paid for something and someone
kinds and nearly every owes it services or the goods.
kind of insurance has a
premium that must be paid in advance, typically for a year at a
time. Since insurance can be a costly item, companies want to
allocate the cost of that protection over the period of time that
is being protected. So, the company writes a check for 12
months of insurance protection and charges it to expense over
the 12 months that it protects, usually by simply charging 1/12
of the total to expense each month. The balance of the advance
premium payment is considered prepaid and it rests in a pre-
paid expense account until it has been entirely written off to
expense. Other examples of prepaid expenses might be proper-
ty taxes or income tax installments.

Fixed Assets—Property and Possessions

Every company acquires physical assets that it uses to conduct
its business—computers, manufacturing equipment, buildings,
land, trucks, and so forth. Those assets are used for extended
periods of time, usually years, and are thus not current assets in
the sense of the items discussed above. These are usually
called “Fixed Assets” or “Property, Plant, and Equipment” or
perhaps—if no real estate or vehicles are owned—“Equipment
and Furnishings.”
Since such assets are used for a number of years and are
not held for resale to customers, they are not considered