Prepaid Expenses
Payments made in advance for future benefits, recorded as assets until consumed, such as prepaid insurance, rent, or subscriptions.
Prepaid Expenses
Expenditures made in advance for goods or services to be received in the future, recorded as current assets until the benefits are realized.
For instance, a business that pays $12,000 annual insurance premium in January would initially record this as a prepaid expense and then recognize $1,000 of insurance expense each month as the coverage period progresses.
Prepaid expenses represent future economic benefits that have been paid for but not yet consumed. The systematic allocation of these costs to expenses over time follows the matching principle, ensuring that expenses are recognized in the same periods as the benefits they provide.