Key Concepts
In the Statement of Financial Performance:
Statement of Financial Performance for the year ended [day month year] (extract)
| $ | $ | |
|---|---|---|
| Sales revenue | X | |
| Less: Sales returns | (X) | |
| Net sales revenue | X | |
| Less: Cost of sales | (X) | |
| Gross profit | X |
Gross profit
Net sales revenue − Cost of sales = Gross profit
Statement of Financial Performance for the year ended [day month year] (extract)
| $ | $ | |
|---|---|---|
| Less: Other expenses | ||
| Salaries expense | X | |
| Insurance expense | X | |
| Utilities expense | X | (X) |
Other expenses (adjusted for any expense payable or prepaid expense) are shown after other income. The amount shown is the adjusted expense — after accounting for any opening/closing payable or prepaid balance.
In the Statement of Financial Position:
After year-end adjustments, expense payable and prepaid expense appear in the Statement of Financial Position:
Statement of Financial Position as at [day month year] (extract)
| $ | |
|---|---|
| Current assets | |
| Prepaid [expense] | X |
| Current liabilities | |
| [Expense] payable | X |
How to Remember
- Prepaid expense → Current asset (already paid for; represents a future benefit)
- Expense payable → Current liability (already used; represents an amount owed)
- In the Statement of Financial Performance, always show the adjusted expense — not the cash paid during the year.
Common Mistakes
1
Showing the cash paid as the expense figure instead of the adjusted (earned/incurred) amount.
2
Classifying prepaid expense as a current liability or expense payable as a current asset — prepaid = asset (future benefit); payable = liability (amount owed).
Check Your Understanding
Where does "Prepaid rent expense" appear in the financial statements?
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Current assets section of the Statement of Financial Position.
True or false — the expense shown in the Statement of Financial Performance equals the cash paid during the year.
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False. It reflects the adjusted expense — after accounting for any opening or closing payable and prepaid balances.
A business has $400 in utilities expense payable at year end. Which section of the Statement of Financial Position does this appear in?
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Current liabilities.