Prepaid expense
Also called: prepayment, prepaid expenses
Cash paid in advance for goods or services that will be used later, such as rent or insurance. It is an asset until used.
When a company pays for something before using it, the payment is recorded as an asset, because the company is owed the future service. As the service is used, the asset is reduced and the cost becomes an expense of that period.
Example
Six months of rent paid in April is a prepaid expense; each month, one-sixth of it becomes rent expense.
Learn more in these lessons
- Accrual accounting and cash accountingWhat is the difference between accrual and cash accounting?
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