Prepaid Expense

When a business pays for something before it benefits from it, the payment is not yet an expense. It is an asset, because the business has a right to receive the goods or services later.

Common examples are insurance premiums, rent paid in advance, software subscriptions and service contracts. As each period passes and the benefit is used, part of the prepaid amount is moved from the balance sheet to the income statement as an expense.

Suppose a company pays 6,000 on 1 July for six months of rent. On that day, it records a prepaid rent asset of 6,000. At the end of each month, 1,000 is moved to rent expense. By 31 December, the prepaid rent has been used up and the asset is zero.

Prepaid expenses usually appear among current assets, because they are typically used within a year. They are the opposite of accrued expenses, which are costs used before they are paid.