prepaids

Prepaids refers to payments made for goods or services before they are received. In accounting, these payments are recorded as assets, specifically prepaid expenses, and are expensed over the period in which the related benefits are realized.

Common examples include prepaid insurance, rent, annual subscriptions, maintenance contracts, and prepaid advertising. The accounting entry at inception is a debit to a prepaid asset and a credit to cash. Over time, as the service is delivered or time passes, the prepaid asset is amortized, with a debit to an expense and a credit to the prepaid asset.

Prepaids must be distinguished from accrued expenses, which are costs incurred but not yet paid. At period end, organizations typically perform a pro rata adjustment to reflect the portion of the service already received.

Prepaid cards are another use of the term. A prepaid card is a payment card loaded with funds in advance and used up to the available balance. They can be non-reloadable or reloadable. They are issued by banks or card networks and are subject to consumer protection, fees, expiration policies, and regulatory oversight. For issuers, prepaid cards create a liability until the funds are spent; for users, they provide a fixed balance for purchases or cash withdrawals.

In business and personal finance, prepaid arrangements can simplify budgeting, but they can also obscure true expenses if not tracked carefully; proper accounting and reconciliation are important to maintain accurate financial reporting.