Prepaid Assets

Definition

Prepaid assets are assets that have been paid for in advance of their use. They are recorded on the balance sheet as current assets and are used to represent the amount of money that has been paid for goods or services that have yet to be received or used.

Example

A company may purchase a one-year subscription to a software program. The cost of the subscription is $1,000 and is paid in advance. The company would record the $1,000 as a prepaid asset on its balance sheet. The asset would then be expensed over the course of the year as the software is used.

Why it Matters

Prepaid assets are important for businesses to track and manage because they represent money that has been spent but not yet used. This can help businesses better manage their cash flow and ensure that they are not overspending on goods or services that have not yet been used. Additionally, prepaid assets can help businesses better plan for future expenses and ensure that they are not overspending on goods or services that have not yet been used.