What Are Prepaid Expenses?

What Are Prepaid Expenses?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Prepaid expenses are future expenses that a company has already paid for, or an expenditure that a company has paid for in advance. These are listed on an income statement as current assets. Examples of prepaid expenses could include rent, insurance, supplies, or utility bills. Essentially, prepaid expenses are costs that have been paid but will benefit the company over time, not immediately.

The main purpose of a prepaid expense is for the expenditure to be consumed over a future period. The prepaid costs may be recorded as an asset because the expenditure provides a future benefit beyond the current report period. As the benefits are realized, or as the time passes, the amount recorded for the prepaid costs is reduced and an expense is recorded.

Related Questions

1. How is a prepaid expense recorded in the income statement?

In an income statement, prepaid expenses are initially recorded as assets. As the benefits of the expenses are consumed, they are written off as expenses in the income statement.

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2. What are some examples of prepaid expenses?

Some common examples of prepaid expenses include insurance premiums, rent, utility bills, office supplies, and advertising costs that a company pays for in advance.

3. How does prepaid expense impact cash flow?

Since prepaid expenses are initially recorded as an asset, the payment of a prepaid expense reduces a company’s available cash but does not immediately impact the income statement. It only does so when the expense is recognized.

4. Are prepaid expenses considered liquid assets?

Yes, prepaid expenses are considered current assets for a company and thus they are considered to be liquid assets. They can be converted into cash within a year or within the operating cycle of the business.

5. How do prepaid expenses differ from accrued expenses?

Prepaid expenses are costs a company has paid for in advance and from which it expects to benefit in the future, while accrued expenses are costs that a company has incurred but has yet to pay.