Prepaid expenses may also provide a benefit to a business by relieving the obligation of payment for future accounting periods.
Sometimes, businesses prepay expenses because they can receive a discount for prepayment. What Are the Benefits of Prepaid Expenses? As the benefits of the good or service are realized over time, the asset's value is decreased, and the amount is expensed to the income statement. The business records a prepaid expense as an asset on the balance sheet because it represents a future benefit due to the business. Prepaid expenses usually relate to the purchase of something, such as rent or insurance, that provides value to the business over several accounting periods (often six months or a year). Prepaid expenses are considered current assets because they are amounts paid in advance by a business in exchange for goods or services to be delivered in the future. As the benefits of the assets are realized over time, the amount is then recorded as an expense.
On the balance sheet, prepaid expenses are first recorded as an asset. Prepaid expenses are future expenses that are paid in advance, such as rent or insurance.
