Prepaid asset definition
/What is a Prepaid Asset?
A prepaid asset is an expense that has already been paid for, but which has not yet been consumed. The concept most commonly applies to administrative activities, such as prepaid rent or prepaid advertising. A prepaid asset appears as a current asset on an organization's balance sheet, assuming that it is expected to be consumed within one year.
Accounting for Prepaid Assets
An expenditure determined to be prepaid is initially recorded in the prepaid expenses account, which is an asset account. Once the asset has been consumed, it is charged to expense. This determination is usually made as part of the closing process at the end of each reporting period.
Prepaid Asset Best Practices
It can take a significant amount of time to monitor the amounts in the prepaid asset account. To minimize this work, charge immaterial prepaid amounts directly to expense as incurred. Doing so avoids the extra labor involved with tracking it as an asset. In addition, maintain a formal listing of all prepaid assets currently in this account, and update it as part of the closing process at the end of each reporting period. Doing so will ensure that all prepaid items are reviewed on an ongoing basis, so that they do not linger in this account.
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Example of a Prepaid Asset
As an example of a prepaid asset, a business pays $12,000 in advance for one year of property insurance. The payment is initially recorded as a prepaid asset. In each month of the year covered by the insurance contract, $1,000 of the insurance asset is charged to expense, which reflects the consumption of the asset over time. By the end of the contract period, there is no longer a prepaid asset associated with the insurance payment.
Similar Terms
A prepaid asset is also known as a prepaid expense.