An amount paid in advance for a future benefit to the business, like rent or insurance premiums. Initially recognized as an asset, then transferred to expense in the period when the benefit is enjoyed.

Example:

Prepaid rent: A company pays £6,000 in advance for three months of office rent. Each month, £2,000 is recognized as rent expense, and the prepaid rent account is reduced.

Prepaid Insurance: A retailer pays £1,200 for a year of insurance. Each month, £100 is recognized as an insurance expense.

Real-Life Scenario: A company pays £12,000 in advance for annual software licensing. Initially recorded as a prepaid expense, the company recognizes £1,000 per month as an expense.