Prepaid Expenses or Prepayments
Accounting glossary · Understand, connect, apply
Prepayments are amounts paid before the related goods or services are consumed. The unused portion is commonly recorded as an asset.
Example
A business pays $1,200 for 12 months of insurance. After one month, $100 becomes an expense and $1,100 remains prepaid.
Remember the difference
The label prepaid expense describes an asset before consumption; paying cash does not make the full amount an immediate expense.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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