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Prepaid Expense: Definition and Meaning
Definition
A prepaid expense is a payment made in advance for a future benefit, such as insurance, rent, software, or certain service contracts.
Why It Matters
Prepaid expenses are generally recorded as assets when paid and recognized as expense as the business receives the related benefit. This helps align expenses with the period in which they apply.
A regular review of prepaid balances helps ensure that expired or fully used amounts are not left on the balance sheet incorrectly.
Example
A business pays an annual insurance premium in advance. The initial payment is recorded as a prepaid expense and recognized over the coverage period.
Related Terms
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