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Accounting
Prepaid Expense
Money paid in advance for something you will use later, like insurance or rent.
Prepaid expenses start as an asset on the balance sheet. Each period an adjusting entry moves part of the prepaid amount into the expense account. It's the opposite of unearned revenue.It's like buying a big bag of snacks at the start of summer camp so you don't have to pay every single day you get hungry.
Real world: A business pays $12,000 for a full year of office rent in January and then records $1,000 as an expense each month as the space is used.
💡 Prepaid expenses make sure you don't expense the whole bill on day one — they spread the cost fairly over the time you're actually using the item.