What are prepaid expenses?

Prepaid expenses are payments a business makes in advance for goods or services it will receive in a future period. Because the benefit has not yet been used, prepaid expenses are initially recorded as assets and recognized as expenses over time.

Example: A company pays for a one-year insurance policy upfront and records the payment as a prepaid expense, recognizing a portion of the cost each month.

Related terms: Assets, Accrual Accounting, Expenses, Balance Sheet