Prepaid Expenses
Definition
Costs you pay in advance for benefits you receive later, like annual software, insurance or trade-show booths. They are assets until used.
Want a deeper explanation?
Prepaids keep big annual payments from distorting a single month. Without them, the month you pay looks terrible and the rest look better than reality.
A simple schedule tracks what is left to expense. Watch for: supplier deposits recorded as prepaid expenses instead of inventory deposits, which mixes two very different things.
Example
You pay $12,000 for a year of software in January. It is recorded as a prepaid asset and expensed $1,000 a month.