Prepaid expenses are payments a company has already made for goods or services it hasn't fully received yet, recorded as an asset and expensed gradually over the period the benefit is actually used.
An annual insurance premium paid upfront is a classic example: the full amount is paid in cash immediately, but only a twelfth of it gets expensed each month as the coverage is actually used. Recording the whole premium as an expense in month one would understate that month's real profitability and overstate every following month's.
Prepaid expenses show up as a current asset on the balance sheet, the mirror image of deferred revenue on the other side of a similar transaction. A company with a lot of prepaid software or insurance contracts is effectively holding future value it's already paid cash for, worth tracking accurately rather than expensing all at once out of convenience.
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