Futureproof
All Terms
AccountingPre-Product Market Fit

Prepaid Expenses

Quick Definition

Payments made in advance for goods or services to be received in future periods.


What are Prepaid Expenses?

Prepaid expenses are assets representing future economic benefit. You paid for something but have not received the full value yet. Common examples include annual software subscriptions, insurance premiums, and rent paid in advance.

Why Prepaid Expenses Matter

Prepaid expenses prevent front-loading costs in the month paid. If you pay $12,000 for annual insurance in January, you should not expense it all in January. You recognize $1,000 each month as you receive the coverage.

For SaaS founders, tracking prepaid expenses ensures monthly financials accurately reflect that month's costs. Otherwise, months with large prepayments look artificially expensive.

Amortizing Prepaid Expenses

Each month, move a portion from the prepaid asset to expense based on time elapsed or benefit received. By the end of the prepaid period, the asset should be zero.

Formula

Monthly Expense = Prepaid Amount ÷ Number of Months

Example

Your SaaS company pays annual subscriptions in January:

  • AWS Reserved Instances: $24,000 (12 months)
  • Slack Annual: $6,000 (12 months)

January Prepaid Asset: $30,000

Monthly Expense Recognition: $2,500

Each month, $2,500 moves from prepaid assets to expense, leaving an $27,500 asset in February, $25,000 in March, and so on.

Related

Related Terms

See These Metrics in Action

Futureproof automatically tracks MRR, ARR, churn, runway, and more — so you can stop calculating and start scaling.