Prepayments include which items?

Prepayments include which items?

• A. Prepaid Expenses and Deferred Revenues
• B. Accrued Liabilities and Accrued Receivables
• C. Unearned Revenues
• D. Accrued Expenses

Answer: (A)

Prepayments arise when cash is paid before the related expense or revenue is recognized. They show up on the balance sheet as assets when the payment is for future benefits (prepaid expenses) and as liabilities when cash has been received before delivering goods or services (deferred or unearned revenues). Therefore, the items that fit as prepayments are both prepaid expenses and deferred revenues (unearned revenue). The other options describe accrual timing differences, not prepayments, so they aren’t the right fit.

Prepayments arise when cash is paid before the related expense or revenue is recognized. They show up on the balance sheet as assets when the payment is for future benefits (prepaid expenses) and as liabilities when cash has been received before delivering goods or services (deferred or unearned revenues). Therefore, the items that fit as prepayments are both prepaid expenses and deferred revenues (unearned revenue). The other options describe accrual timing differences, not prepayments, so they aren’t the right fit.