Prepaid Expenses

Prepaid Expenses (Definition)

Prepaid expenses are expenses paid in advance and recorded as assets before they are used or consumed.

Key aspects of prepaid expenses include:

1. Represent future expenses that have been paid in advance
2. Recorded as current assets on the balance sheet
3. Examples include prepaid rent, insurance premiums paid in advance, or supplies purchased for future use
4. Gradually expensed over time as the benefit is realized
5. Help in matching expenses to the appropriate accounting period
6. Important for accurate financial reporting and budgeting
7. Understanding prepaid expenses is crucial for proper accrual accounting

Proper accounting for prepaid expenses ensures accurate financial statements and helps in managing cash flow effectively.