Prepaid Expenses

The same sorts of techniques are also used for pre-paid expenses. If you have to pay out down six months of rent in advance, that is treated as an "accrued asset."

• At the time of payment, you debit Prepaid Rent for the amount paid, which is a credit to Cash. This puts an unfortunate dent in the Cash account, but it does show on the books as an asset, and there are no more payments to make for the next six months.

• Each month, the balance in Prepaid Rent goes down by debiting Rent Expense and crediting Prepaid Rent.

Similarly, companies collect payroll taxes on behalf of employees, and track them in a special account.

• That money is not the company's, so there is a debit to the Cash account on one side, and a Credit to an Accrued Liability, namely, Payroll Taxes Payable, on the other side.

• When the company sends its quarterly payroll tax check to the Government, Payroll Taxes Payable drops, as does the balance in the Checking Account.