What are Prepaid Expenses?

Prepaid Expenses (Definition)

Prepaid expenses are future expenses of a business that have been paid for upfront but are not recorded as an expense until later. They are initially recorded as an asset on the balance sheet of the company because of the anticipated future financial gain, then once the asset's benefits have been realised, the sum is recorded as an expense. The most common prepaid expenses are insurance and rent. For example, insurance on a company’s vehicle is paid every six months. The payment is recorded as a current asset as prepaid insurance, then monthly, 1/6 of the payment becomes an expense until all six months of prepaid insurance are transferred.