Prepaid expenses
Prepaid expenses (in UK accounts often called “prepayments”) are costs you pay in advance for goods or services you will use later. Instead of taking the whole cost to profit and loss when you pay, you record a prepayment as a current asset and move it to expense as the benefit is used.
Typical prepaid expenses include:
- Rent or insurance paid in advance
- Software or other subscriptions
- Service and maintenance contracts
- Licences and memberships
Simple example
You pay an annual insurance bill up front. You record it as a prepayment, then recognise a portion as an expense each month as the cover is used.
In the accounts, prepayments appear on the balance sheet under Prepayments (sometimes within “prepayments and accrued income”). At period end you adjust for the unused part; in the next period it is released to expense. If you use accrual accounting, you make these adjustments; under a pure cash basis you typically would not.
