Often, businesses prepay expenses in this manner because they can receive a discount. Items such as insurance and rent can be paid for with one payment that covers the cost of the expense for several months or a year.
What Is Amortization of Prepaid Expenses?Īmortization of prepaid expenses is an accounting process that calculates the incremental or periodic cost of a recurring expense that has been paid for in advance and applies the cost back to each of the individual accounting periods that benefit from the payment.įor example, if a business pays for a year’s worth of insurance coverage, amortization is the process of calculating what the monthly premium would be for the insurance and applying that cost to each of the monthly accounting periods within the year.Ī prepaid expense is an expense that is paid for in advance and usually in a lump sum.
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