Prepaid asset

A prepaid asset is an expense that has already been paid for, but which has not yet been consumed. The concept most commonly applies to administrative activities, such as prepaid rent or prepaid advertising. A prepaid asset appears as a current asset on an organization's balance sheet, assuming that it is expected to be consumed within one year. Once the asset has been consumed, it is charged to expense.

For example, a business pays $12,000 in advance for one year of property insurance. The payment is initially recorded as a prepaid asset. In each subsequent month, $1,000 of the insurance asset is charged to expense, which reflects the consumption of the asset over time.

When the amount of a prepaid asset is immaterial, it is commonly charged directly to expense. Doing so avoids the extra labor involved with tracking it as an asset.

Similar Terms

A prepaid asset is also known as a prepaid expense.