What are prepaid expenses?

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Prepaid expenses are future expenses that have been paid in advance. You can think of
prepaid expenses as costs that have been paid but have not yet been used up or have not
yet expired.

The amount of prepaid expenses that have not yet expired are reported on a company’s
balance sheet as an asset. As the amount expires, the asset is reduced, and an expense is
recorded for the reduction. Hence, the balance sheet reports the unexpired costs, and the
income statement reports the expired costs.