A prepaid asset is a financial resource available to an entity for future use. It occurs when a company’s cash outlay precedes the benefit received. For example, a company may prepay office rent for the entire year. If rent is $1,000 per month, a prepaid asset of $12,000 is established.
A prepaid asset is reported on the balance sheet, and its carrying value is reduced through amortization. For instance, in the situation above, $1,000 of rent would be manually adjusted from a prepaid asset to an expense at the end of the first month. This is because the benefit of having an office space has been received due to the passage of time. Other prepaid situations arise due to insurance, legal fees, or taxes.