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Simple English definitions for legal terms
prepaid expense
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A quick definition of prepaid expense:
A prepaid expense is when you pay for something before you actually use it. This could be things like rent, insurance, or interest. It's important to keep track of prepaid expenses because they can affect your financial statements and taxes.
A more thorough explanation:
A prepaid expense is an expense that is paid in advance before the service is rendered or the due date. It is a type of expense that is recognized as an asset on the balance sheet until the service is received or the due date arrives.
For example, a company may pay rent for the next six months in advance. The rent paid in advance is considered a prepaid expense until the end of the six-month period. Another example is when a company pays for insurance coverage for the next year in advance. The insurance premium paid in advance is considered a prepaid expense until the end of the coverage period.
Prepaid expenses are important for businesses to track because they affect the company's financial statements. They are recorded as assets on the balance sheet and are gradually recognized as expenses on the income statement over time.