A prepaid expense is a payment made in advance for goods or services to be received later, recorded as an asset until the benefit is used up.
When you pay for something before you use it, insurance for the year, rent for next month, an annual software subscription, you have not yet received the benefit, so it is not yet an expense. Under accrual accounting it is recorded as a prepaid expense, an asset, and expensed gradually as the benefit is consumed.
Prepaid expenses are the mirror image of deferred revenue. For tax, the general rule is that prepaid amounts are deductible over the period they relate to, not all in the year paid, so paying next year's costs early does not usually accelerate the deduction.
You pay $12,000 for a one-year insurance policy in January. It is recorded as a prepaid asset and expensed at $1,000 a month as coverage is used, rather than a $12,000 expense all in January.
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