This is a basic accounting question. I realize that an increase in prepaid expense refers to the payment of a good or service that is not delivered in the current period. However, doesn't an increase in inventory reflect the same thing? What is the difference that I am missing?
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1Sure, but it feels odd to think of most services as inventory. How much insurance do we have in our inventory? 6 months worth. I think the distinction makes sense, inventory is stuff we have on hand, prepaid expense are things we don't have. You don't really need either, could pile the entries from both into Assets and be fine, but it'd be confusing.– Hart COAug 30, 2019 at 20:10
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2While I'm voting to close as off-topic, note that prepaid expense is a service you've paid for but haven't used [think, paying your rent a month in advance, or paying for a year of insurance all at once], but inventory is something you own and will eventually sell. This is different.– Grade 'Eh' BaconAug 30, 2019 at 20:11
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1 Answer
When you pay a prepaid expense these accounts are reflected
+ prepaid expenses account
- cash/bank account
when the goods are delivered to you these accounts are reflected
+ inventory account
- prepaid expenses account
When you buy goods and get them (without prepaid expenses)
+ inventory account
- cash/bank account
Both the inventory and the prepaid expenses accounts are debit accounts and considered to be from the assets of the company and show in the balance sheet.
