A prepaid asset is a financial resource available for future use. You realize the benefit of the asset at a later date than you paid for it. You record a prepaid asset on your balance sheet, reducing its value over time while reporting an expense on the balance sheet each time you do.
Examples of Prepaid Assets
For example, say you prepay a business insurance policy at $12,000 per year to cover the next 12 months. At the time you make the payment, you record a prepaid asset of $12,000. Once a month, you draw down the prepaid asset by $1,000 while recording an expense of $1,000. In this way, your books stay balanced between assets and expenses as you realize the benefit of this prepaid asset.
You might use a prepaid asset over time, or it may be something you benefit from down the road. For example, if a landlord requires you to pay first and last month’s rent up-front, you don’t realize the benefit of the last month’s rent until the end of your lease. Therefore, your last month’s rent is a prepaid asset that you don’t expense until the last month.
Other prepaid assets include fees paid to professionals, such as lawyers or accountants, and taxes. You may prepay a lawyer to retain the attorney over the course of a year. You may prepay quarterly taxes to the Canada Revenue Agency, even though they don’t impact your return until you file it.
Keeping accurate records and tracking expenses can lead to better reporting of prepaid assets. Your records can also help during tax time as you file correct returns. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.