What Does Prepaid Mean in Accounting?

In accounting, a Prepaid account represents cash expended prior to goods or services being received. Examples of Prepaid accounts are Prepaid Expense, Prepaid Rent, and Prepaid Insurance. A Prepaid account is an asset. It has a normal debit balance. It is listed in the Current Asset section on the Balance Sheet.

What are Some Examples of Prepaid Accounts?

This table shows a list of common prepaid accounts businesses use to track the amounts the business prepays for future goods and services.

Prepaid Rent	Prepaid Insurance
Prepaid Subscriptions	Prepaid Interest
Prepaid Expenses	Prepaid Taxes

What is Prepaid Rent?

Prepaid Rent represents rent paid to a landlord prior to when the rent is due. An example of prepaid rent would be a landlord requiring first and last month’s rent at the time the lease is signed. The first month’s rent would be recorded as Rent Expense while the last month’s rent would be recorded as Prepaid Rent. Prepaid Rent is an Asset. It has a normal debit balance. It increases on the debit side.

The journal entry for Prepaid Rent is:

Prepaid Rent	1200
Rent Expense	1200
Cash		2400

When the Prepaid Rent is “used up”, an adjusting journal entry is used to move the amount out of Prepaid Rent and into Rent Expense:

Rent Expense	1200
Prepaid Rent		1200

If a business prepaid three months of rent, as each month passes, one month’s rent is moved from Prepaid Rent into Rent Expense. The original journal entry would be:

Prepaid Rent	3600
Cash		3600

When the first month’s rent is due, an adjusting journal entry is done to move one month’s rent from Prepaid Rent to Rent Expense:

Rent Expense	1200
Prepaid Rent		1200

After the first month’s journal entry is completed, the balance in Prepaid Rent is now $3,600 – $1,200 = $2,400.

When the second month’s rent is due, an adjusting journal entry is done to move one month’s rent from Prepaid Rent to Rent Expense:

Rent Expense	1200
Prepaid Rent		1200

After the second month’s journal entry is completed, the balance in Prepaid Rent is now $3,600 – $2,400 = $1,200.

The final adjusting journal entry is done in the third month, bringing the balance in Prepaid Rent to zero.

What is Prepaid Insurance?

Prepaid Insurance represents insurance premiums paid to insurers in advance. An example of this is a company paying a year of insurance in advance. Prepaid Insurance is an Asset. It represents cash paid for services that have not yet been received. It has a normal debit balance. It increases on the debit side. It is listed in the Current Asset section on the Balance Sheet.

The journal entry for Prepaid Insurance is:

Prepaid Insurance	2400
Cash		2400

As the Prepaid Insurance is “used up”, an adjusting journal entry is used to move the amount out of Prepaid Insurance and into Insurance Expense:

Insurance Expense	200
Prepaid Insurance		200

This adjusting journal entry would be done each month for twelve months until the prepaid premium is “used up” and the balance is zero.

What is Prepaid Expenses?

Prepaid Expenses is an account used to track the payment in advance of any substantial prepayments for goods and services. This could include goods paid for in advance of delivery or services paid for in advance of the service being delivered. Prepaid Expense is an Asset. It represents cash paid for services or goods in the current month that will be received in a future month. It has a normal debit balance. It increases on the debit side. It is listed in the Current Asset section on the Balance Sheet.

Prepaid Expense account is used to record amounts that are paid for in one accounting period and received in another accounting period. An example of a Prepaid Expense is prepaid marketing. If a company is required to pay in advance for marketing consulting on a contract that will be completed in the next month, Prepaid Expense is used to record the prepayment. When the contract is completed the next month, the amount is moved out of Prepaid Expense and into Marketing Expense using an adjusting journal entry.

Here is the original journal entry to record the prepayment of marketing costs:

Prepaid Expense	10,000
Cash		10,000

Here is the adjusting entry in the next month to record the receipt of the services:

Marketing Expense	10,000
Prepaid Expense		10,000

The balance in Prepaid Expense is now zero.

How are Prepaid Expenses are Listed on the Balance Sheet

On the Balance Sheet, Prepaid accounts including Prepaid Insurance, Prepaid Rent, and Prepaid Expenses are recorded in the Current Asset section.

On the Balance Sheet, the Prepaid accounts would be listed:

Assets

Current Assets

Cash

Accounts Receivable

Prepaid Rent

Prepaid Insurance

Prepaid Expense

For step-by-step guidance on how to do journal entries, check out this article:

How Do You Do Journal Entries in Accounting: Step-by-step