Florida General Contractor Practice Exam

What is the term for an item that you pay for first and recognize later?

1. Prepaid expense

2. Accrual

3. Deferred revenue

4. Outstanding liability

The correct answer is: Prepaid expense

The term "prepaid expense" refers to a payment made in advance for goods or services that will be received in the future. In accounting, this concept represents an asset on the balance sheet because it signifies the right to receive benefits in future periods. By paying for an item upfront, the expense is recognized later as the services or goods are consumed or received. This aligns with the matching principle in accounting, which states that expenses should be recognized in the period when the related benefits are realized. In contrast, other terms in the choices pertain to different accounting treatments. Accrual refers to revenues or expenses that are recognized before cash changes hands, thus not fitting the definition given. Deferred revenue, on the other hand, signifies money received in advance for services yet to be performed or goods yet to be delivered, which also doesn’t match the description. Outstanding liability involves obligations that a company currently owes, typically representing money owed to others, which differs from an initial payment made for future benefits.