Prepaid Expenses

What are Prepaid Expenses?

Prepaid Expenses are payments made in advance for goods or services to be received or used in the future. These payments are considered assets on the balance sheet as they provide future economic benefits. As the services are utilized or the goods are consumed, they are recorded as expenses, reducing the asset over time.

Short Description: Assets representing expenses paid in advance which are accounted over time as they are incurred.

• Examples: Insurance premiums, rent, and subscriptions paid upfront.
• Accounting Treatment: Initially recorded as an asset and recognized as an expense when consumed or used.
• Benefit: Helps allocate cost appropriately to the period in which it benefits.

Prepaid Expenses reflect prudence in accounting to ensure that costs are matched with their associated revenues, adhering to the matching principle in financial statements.