Prepaid expense vs accrued expense
Each, defined
Prepaid expense
Prepaid expense — Cash paid before the benefit is consumed — an asset until it is.
Accrued expense
Accrued liability — An obligation for goods or services received but not yet invoiced or paid — wages, interest, professional fees — recorded by an accrual.
Side by side
| Prepaid expense | Accrued expense | |
|---|---|---|
| Cash moves | Before the cost is used | After the cost is used |
| Balance sheet | Current asset | Current liability |
| Monthly adjusting entry | Debit expense, credit prepaid | Debit expense, credit accrued expenses |
Paying first versus using first
$12,000 of insurance paid on January 1 is a prepaid that falls by $1,000 a month. Had the insurer billed monthly in arrears, the same months would have carried an accrued expense of $1,000 at each month-end instead.
| Month | Expense | Prepaid, if paid up front |
|---|---|---|
| Jan 2026 | 1,000.00 | 11,000.00 |
| Feb 2026 | 1,000.00 | 10,000.00 |
| Mar 2026 | 1,000.00 | 9,000.00 |
| Apr 2026 | 1,000.00 | 8,000.00 |
| May 2026 | 1,000.00 | 7,000.00 |
| Jun 2026 | 1,000.00 | 6,000.00 |
How they relate
Both exist so that the expense lands in the month the cost is used. If the cash goes out first, the balance sheet holds an asset until the cost is consumed; if the cost is consumed first, it holds a liability until the cash goes out.
Each has its own adjusting entry, and each should tie to a schedule or a supporting document at every month-end.
Questions
- Is a prepaid expense an asset?
- A prepaid is a current asset when consumed within twelve months.
- What are common examples of each?
- Insurance, software subscriptions and rent paid in advance are prepaids. Unbilled contractor work, utilities and interest are accruals.
Also confused with these
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.Entry
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.Entry
- Journal entry for a prepaid software subscriptionWhen an annual software subscription is paid up front, debit Prepaid software and credit Cash (or Accounts payable). Each month-end, debit Software expense and credit Prepaid software for the days of service used that month.Entry
- Prepaid & deferred releaseA premium paid on the 17th does not release in twelve equal slices. Day-weighted, or even — your call.Tool
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.