Prepaid expense
A prepaid expense is a cost paid in advance of the period it benefits, recognised initially as a current asset; as each period passes, the portion consumed is transferred from the asset to an expense on the income statement.
FrameworkAccrual accounting
See it move
A company pays €12,000 on 1 October for twelve months of insurance, recording it as a prepaid asset rather than an expense. By the 31 December year end, three months have passed, so €3,000 moves from the asset to insurance expense on the income statement, leaving €9,000 still sitting as a prepaid asset on the balance sheet.
Check yourself
On 1 October a firm pays €9,000 for twelve months of building insurance. The financial year ends 31 December. Which of the following correctly states the insurance expense and the balance sheet asset at 31 December?