What are prepaid expenses?
Prepaid expenses are expenses paid for in advance and recorded as assets before they are used or consumed. Prepaid expenses are shown in the assets section on the balance sheet. Examples of prepaid expenses can be insurance premiums or rent. When a company pays insurance premiums in advance, the insurance coverage relates to a future period. The same is true for rent: when a company pays rent in advance, the rent is related to the occupancy of premises (i.e., building) in the future. Therefore, insurance and rent expenses relate to future periods, and thus, they are called prepaid expenses. When the insurance coverage starts or the rent period begins, the company will start expensing the prepaid amount. The expensing is usually done over the term of the insurance coverage or rent on a straight-line basis. However, note that other methods of amortization (different from straight-line) are also applied. Prepaid expenses usually represent a short-term asset because they will be consumed (
