Definition: A prepaid expense is an expenditure that is paid for in one accounting period, but for which the underlying asset will not be entirely consumed until a future period. An example of a prepaid expense is insurance, which is frequently paid in advance for multiple future periods; an entity initially records this expenditure as a prepaid expense, and then charges it to expense over the usage period.
For example, a company prepays $2,400 of insurance that will cover a one-year period. The initial entry is to the prepaid expense (asset) account. $200 of this amount is charged to expense in each of the following 12 months, until the entire asset has been consumed.
A prepaid expense is listed within the current assets section of the balance sheet until the prepaid item is consumed. Once consumption has occurred, the prepaid expense is removed from the balance sheet and is instead reported in that period as an expense on the income statement. If the total ending balance in the prepaid expenses account is quite small, it may be aggregated with other assets and reported within an "other expenses" line item in the balance sheet.