Pre-paid expenses are a type of assets on the balance sheet that results from a business making advanced payments for goods or services to be received in the future. Prepaid expenses are usually recorded as current assets and the value of the prepaid expenses is expensed over time as the goods or services are utilized for business activities.
A common example of a prepaid expense would be insurance premiums that are paid annually. At the end of the fiscal year, any amount of insurance premium related to the fiscal year would be expensed, but the insurance premium related to the upcoming fiscal year will be accrued as prepaid expenses that will be expensed until the period of insurance has ended.
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