what is a prepaid expense 
a prepaid expense is an expense that has been paid for in advance but not yet incurred in business a prepaid expense is recorded as an asset on the balance sheet that results from a business making advance payments for goods or services to be received in the future prepaid expenses are initially recorded as assets but their value is expensed over time onto the income statement unlike conventional expenses the business will receive something of value from the prepaid expense over the course of several accounting periods madelyn goodnight investopediaunderstanding prepaid expensescompanies make prepayments for goods or services such as leased office equipment or insurance coverage that provide continual benefits over time goods or services of this nature cannot be expensed immediately because the expense would not line up with the benefit incurred over time from using the asset due to the nature of certain goods and services prepaid expenses will always exist for example insurance is a prepaid expense because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens in the future clearly no insurance company would sell insurance that covers an unfortunate event after the fact so insurance expenses must be prepaid by businesses recording prepaid expensesaccording to generally accepted accounting principles gaap expenses should be recorded in the same accounting period as the benefit generated from the related asset for example if a large copying machine is leased by a company for a period of 12 months the company benefits from its use over the full time period 1recording an advanced payment made for the lease as an expense in the first month would not adequately match expenses with revenues generated from its use therefore it should be recorded as a prepaid expense and allocated to expenses over the full 12 months journal entries that recognize expenses related to previously recorded prepaid expenses are called adjusting entries they do not record new business transactions but simply adjust previously recorded transactions adjusting entries for prepaid expenses is necessary to ensure that expenses are recognized in the period in which they are incurred example of a prepaid expensefor example assume company abc purchases insurance for the upcoming 12 month period it pays 120 000 upfront for the insurance policy company abc will initially book the full 120 000 as a debit to prepaid insurance an asset on the balance sheet and a credit to cash each month an adjusting entry will be made to expense 10 000 1 12 of the prepaid amount to the income statement through a credit to prepaid insurance and a debit to insurance expense in the 12th month the final 10 000 will be fully expensed and the prepaid account will be zero 