Prepaid Expenses
Expenses paid in advance before they are incurred, recorded as assets.
Prepaid expenses are payments for goods or services to be consumed in the future, initially recorded as current assets. As the benefit is used, the prepaid balance is reduced and recognized as an expense through adjusting entries. Common examples include insurance premiums, rent paid in advance, and annual software subscriptions.
Example
A business pays $12,000 for a one-year insurance policy on January 1—each month, $1,000 moves from the prepaid asset to insurance expense.
Why It Matters for Your Business
Correct treatment prevents overstating expenses in one period and understating them in another, ensuring each month's financials reflect actual costs.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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