Prepaid Expense
Also called: prepayment, advance expense
What is Prepaid Expense?
A prepaid expense is a payment made in advance for something that will be consumed later — annual insurance, a software subscription, rent paid ahead. Until consumed, it is an asset rather than an expense.
Why Prepaid Expense matters
Charging a twelve-month payment entirely to one month ruins that month's result and understates the eleven that follow. Prepayments put each month's cost where it belongs.
Prepaid Expense formula
Monthly charge = Total prepayment ÷ Number of periods covered
The unreleased balance stays on the balance sheet as an asset.
How Prepaid Expense works in practice
Record the payment as an asset and release one month's worth into expense each period. Annual insurance, licences and maintenance contracts are the most common cases in small businesses.
Frequently asked questions
Yes, until it is consumed. It represents a service you have paid for and not yet received.