What is Prepaid Expense?
Nexa Consultancy | Startup & Finance Glossary
A Prepaid Expense is an asset on the balance sheet that results from a business making advance payments for goods or services that will be received in the future. As the goods or services are used over time, the asset is expensed on the income statement.
For Startups: A common prepaid expense for a startup is office rent paid in advance or an annual insurance premium. By recording it as a prepaid asset first, the startup correctly matches the expense to the period in which it is incurred, in line with the accrual accounting principle.
Example: A startup pays its annual office rent of ₹12 Lakhs upfront in January. It records this as a Prepaid Rent asset. Each month, it then records a rent expense of ₹1 Lakh on its P&L and reduces the Prepaid Rent asset by the same amount.