Prepaid expense
Financial Accounting glossary · The Accounting Cycle & Financial Statements
Definition
Asset representing amounts paid in advance for goods or services to be received in future periods.
Prepaid expense in plain English
A prepaid expense is money you've already paid for something you haven't received yet, so it counts as an asset (something of value you still have coming to you) rather than an expense right now. Think of paying for a 12-month gym membership up front: on day one you haven't 'used up' those months, so you're really holding 12 months of future workouts you're owed. In accounting, the company parks that payment as an asset and then, month by month, turns each used-up chunk into an actual expense. Classic examples are prepaid rent and insurance paid several months in advance.
Related Financial Accounting terms
Financial Accounting practice questions · Financial Accounting flashcards · Financial Accounting study guide