When calculating prepaid expenses, what is the correct mathematical approach?

To determine the correct approach when calculating prepaid expenses, it is essential to recognize how these expenses are accounted for over time. Prepaid expenses are amounts paid in advance for services or goods that will be received in the future.

When evaluating changes in prepaid expenses, the focus is on identifying the net change from one accounting period to the next. The correct method is to take the closing balance of prepaid expenses and subtract the opening balance. This approach provides the change in prepaid expenses during the period, reflecting whether there has been an increase or decrease in the prepaid expenses account.

If the closing balance is higher than the opening balance, this indicates additional prepaid expenses have been recognized during the period. Conversely, if the closing balance is lower, it implies that some of the prepaid expenses have been used up or adjusted against the revenue for that period. Therefore, this method effectively captures the adjustments made to prepaid expenses over the specified timeframe, leading to an accurate assessment of the prepaid expenses on the balance sheet.