Prepaid Expense

An expenditure paid in advance but not yet incurred, representing an asset on the balance sheet until the related benefit is received.

A prepaid expense refers to an advance payment made by a small business for goods or services that will be received in the future. It represents an asset on the business's balance sheet, as the payment has been made but the benefits or services are yet to be utilized or received. Prepaid expenses commonly include items like insurance premiums, rent, or annual subscriptions. By prepaying for these expenses, small business owners can effectively manage their cash flow and ensure timely coverage or access to essential services. Prepaid expenses are recorded as assets initially and gradually recognized as expenses over the period in which the benefits are realized, aiding in accurate financial reporting and budgeting for the small business.