Amortization of Prepaid Expenses

Definition

Amortization of prepaid expenses is an accounting process used to spread the cost of a prepaid expense over the period of time that the expense will benefit the company. This process is used to match the cost of the prepaid expense to the period in which the company will receive the benefit from the expense.

Example

For example, a company may purchase a one-year subscription to a software program for $1,000. The company will receive the benefit of the software for the entire year, but the cost of the subscription must be spread out over the 12 months of the year. The amortization of prepaid expenses process is used to spread the cost of the subscription over the 12 months, so that the company can accurately match the cost of the subscription to the period in which it will receive the benefit.

Why it Matters

Amortization of prepaid expenses is important because it allows companies to accurately match the cost of an expense to the period in which the company will receive the benefit from the expense. This helps companies to accurately track their expenses and ensure that they are not overspending on any particular expense. Additionally, amortization of prepaid expenses helps companies to accurately report their financial performance, as it ensures that expenses are being reported in the period in which they are incurred.