---
title: "What is prepaid expense?"
description: "Prepaid Expense explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/prepaid-expense/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is prepaid expense?

Glossary

A prepaid expense is a payment made in advance for a good or service that will be received over future periods, such as insurance or rent. It is recorded as an asset and gradually moved to expense as it is used.

Updated September 2026

## How prepaid expense works

When a business pays for something upfront, like a full year of insurance, the payment does not immediately become an expense. Instead, it is recorded as a prepaid asset on the balance sheet, since the business has not yet received the full benefit of what it paid for. Common examples beyond insurance include annual software licenses, prepaid rent, and retainers paid to outside professionals.

Each month, a portion of the prepaid balance is moved to expense through an adjusting entry, matching the cost to the period it actually covers. This keeps monthly expenses steady and accurate instead of showing one large spike in the month the payment was made. Common examples include insurance, rent, and annual software subscriptions. Skipping this step and expensing the full payment upfront can make a single month look far less profitable than it actually was.

## Example

A company pays $6,000 for a 12 month insurance policy starting January 1. It records the full $6,000 as a prepaid asset. Each month, it moves $500 from prepaid insurance to insurance expense. By April 30, $2,000 has been expensed and $4,000 remains as a prepaid asset for the remaining eight months of coverage.

## Prepaid expense in QuickBooks Online vs Xero

In QuickBooks Online, prepaid expenses are usually tracked in a dedicated asset account and released using a recurring journal entry set up under Recurring transactions. Xero handles this with its Prepayments feature, which can automatically spread a bill across future periods on a set schedule. Both require the prepaid account to be set up in the chart of accounts. If the prepaid schedule is set up incorrectly, the expense can be released too early or too late, distorting monthly results.

## Related terms

- [Deferral](https://ledgerbpo.com/glossary/deferral/)
- [Accrued expense](https://ledgerbpo.com/glossary/accrued-expense/)
- [Adjusting entry](https://ledgerbpo.com/glossary/adjusting-entry/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles prepaid expense

We track prepaid expenses and release them to the income statement on schedule each month, so costs like insurance and annual subscriptions do not distort a single month's numbers. A dedicated accountant sets up and maintains the release schedule as part of month-end close. You get expenses that match the period they actually cover. We confirm the prepaid schedule matches the actual contract terms before the first release is ever recorded.

[Close the books in days, not weeks](https://ledgerbpo.com/services/month-end-close/)

Next step

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Source: https://ledgerbpo.com/glossary/prepaid-expense/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt