Glossary · Financial statements
Prepaid expense
A prepaid expense is a cost paid in advance for something the business will use over future periods, such as an annual insurance policy or rent paid ahead. It is recorded as an asset when paid, then moved into expense a slice at a time as each period goes by.
Glossary / Prepaid expense · Also called Prepayment, Prepaid asset
How it works
When you pay a year of insurance in January, you have not used a year of insurance in January. You have bought a right to coverage for twelve months. That right is an asset, and it is used up month by month.
Each month an adjusting entry moves one month's share from the prepaid asset to the expense account. The profit and loss then shows the same insurance cost every month, and the balance sheet shows how much coverage is left.
Very small prepayments are often expensed straight away for simplicity. Your accountant can tell you where the line is for your business.
Common prepaid expenses are insurance premiums, rent paid in advance, annual software or maintenance contracts, and deposits on trade shows. Each one should have a schedule showing the start date, the monthly amount and the balance left.
Worked example: Annual insurance paid in January
A contractor pays $3,600 on January 1 for a 12-month liability policy.
| Date | Prepaid Insurance (asset) | Insurance expense this month |
|---|---|---|
| January 1: payment | $3,600 | $0 |
| January 31 | $3,300 | $300 |
| June 30 | $1,800 | $300 |
| December 31 | $0 | $300 |
In AcboBooks
In AcboBooks, a prepaid expense is an other current asset in the chart of accounts. The monthly entry can be a journal entry memorized to repeat monthly, so it is entered on schedule when you open the company.
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Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
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