Costs paid in advance — assets that become expenses over time.
Prepaid expenses are payments made before the benefit is received: a year of insurance, an annual software subscription, rent paid ahead. Until used up, they're assets — the business owns future coverage or service.
Each period, a slice moves from the prepaid asset to expense, matching cost to the months that benefit. It's the mirror image of an accrued expense. For very small amounts, many businesses just expense immediately for simplicity — a reasonable policy, as long as it's consistent.
A $1,200 annual insurance premium paid January 1 is recorded as a prepaid asset, then expensed $100 per month. In June, the books show $600 of insurance expense so far, and a $600 asset for coverage still owned.
Accrued Expenses · Cash-Basis Accounting · Balance Sheet — or browse the full plain-English glossary.
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