What are prepaid expenses considered until they are incurred?

Prepaid expenses are considered assets until they are incurred because they represent payments made for goods or services that will be received in the future. When a company pre-pays for expenses, such as insurance premiums or rent, it essentially creates a future benefit that it has already paid for.

This classification as an asset reflects the economic resource that the company holds, which will provide value over time. Once the time has elapsed or the service has been utilized, these prepaid expenses are then recognized as an expense on the income statement, thereby reducing the asset on the balance sheet. Recognizing prepaid expenses as assets prior to consumption helps in accurate financial reporting and aligns with the accrual basis of accounting, which matches revenues and expenses in the period they are earned or incurred, respectively.