Prepaid expenses refer to payments made by a business for goods or services that will be received or used in the future. They are recorded as assets on a company’s balance sheet, because they represent resources that will be used up over time. The payments for prepaid expenses are made in advance and are recorded as an asset on the balance sheet until the goods or services are received or used, at which point they are recorded as an expense.
Examples of prepaid expenses include:
- Insurance premium payments made in advance for coverage over several months
- Rent payments made in advance for a lease on a property
- Advance payments for goods or services such as office supplies, software licenses, and subscriptions.
By tracking prepaid expenses, a business can have a better idea of the cash outflows in future, also it can help to estimate when the expenses will be incurred and it can help the company to budget the expenses.
