A prepaid expense is an asset on the balance sheet.  Due to accounting principles, expenses are often accrued on the balance sheet and expensed in a later period. Often, an expense is accrued to match to the earned revenue for which it was incurred.  This is done for expenses relating to manufactured goods that will be sold to customers at a later date.  Matching expenses with revenue gives a better picture of a business’s operations. In other cases, an expense is matched within the same period it is used.  For instance, ABC Inc., purchases $12,000 worth of insurance for the upcoming year.  If ABC pays the insurance in January and expenses the entire amount in that month, its income statement will not accurately reflect the true nature of the insurance it used for January.  ABC bought insurance for the entire year, but in January it only used 1/12th of the total insurance, or $1,000. To properly account for this at the time the insurance is purchased, ABC books the $12,000 of insurance as a prepaid expense on its balance sheet.  At the close of each month, an entry is made to expense $1,000 of the prepaid insurance on the income statement and reduce the prepaid insurance expense by $1,000 on the balance sheet.  ABC will do this every month until the end of December when the prepaid insurance balance will be zero.