Prepaid expenses.

In plain English

A prepaid expense is cash spent in advance for a future benefit, recorded as an asset and moved into expense during the periods when that benefit is received. Insurance premiums, annual software licenses, and rent paid ahead are the usual examples. The company reduces the asset and records expense on a schedule, often evenly across the covered months. This is the mirror image of an accrued expense, where the benefit comes first and the cash later. It is also the customer-side twin of the seller's deferred revenue.

01Why it matters

Paying a year of insurance in January does not make January a terrible month on an accrual income statement, and knowing that stops you from misreading your own results.

02The math, step by step

Say a business pays 12,000 dollars in January for twelve months of insurance. January records a 12,000 dollar asset, not a 12,000 dollar expense. Each month 1,000 dollars moves into expense (12,000 divided by 12). By June the asset is 6,000 dollars.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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