Glossary

Prepayment

A prepayment is a cost paid in advance — carried as an asset and spread over the periods it benefits, so profit is not distorted.

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Paid aheadFor future benefit

AssetOn balance sheet

Definition

A prepayment is a cost paid in advance for a benefit the business will receive in a future period — annual insurance, rent, or a software subscription paid upfront. The unused portion is carried as an asset.

In plain terms

If you pay a year's insurance in one go, only one month's worth is a cost this month; the rest is a prepayment — value you have paid for but not yet used. It unwinds into expense over the period it covers.

Why it matters for your company

Prepayments spread advance payments across the periods they benefit, under the matching principle, so profit is not distorted by lumpy upfront payments. Overlooking them overstates costs in the month you pay and understates them later.