What Is a Prepaid Expense?
Definition, the adjusting entry, and a worked example.
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| Examples | Insurance, rent paid ahead, annual subscriptions |
|---|---|
| Classified as | Current asset |
| Opposite of | Accrued expense |
Prepaid expense in plain English
If you pay 12 months of insurance today, only part of it belongs to this accounting period. The rest is still “unused”, so it is carried forward as an asset and moved to expense month by month.
Worked example
On 1 October a business pays 12,000 for a year of insurance. Its year ends on 31 December.
1 October: debit Prepaid insurance 12,000, credit Cash 12,000.
31 December: three months are used up, 12,000 × 3 ÷ 12 = 3,000.
| Adjusting entry | Debit | Credit |
|---|---|---|
| Insurance expense | 3,000 | |
| Prepaid insurance | 3,000 |
The balance sheet still shows 9,000 of prepaid insurance as an asset.
- Charging the whole payment to expense in the month it is paid.
- Forgetting the year-end adjusting entry.
Frequently asked questions
Is a prepaid expense an asset?
Yes. It is a current asset until the benefit is used.
What is the difference between prepaid and accrued expenses?
A prepaid expense is paid before it is used. An accrued expense is used before it is paid.
Why do we adjust prepaid expenses?
So each period is charged only with the cost that belongs to it.
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This page is for general learning. Accounting rules vary by country and standard.