Prepayments refer to the payments made in advance for expenses related to goods or services that will be received or incurred at a later date. These are recorded as assets on the balance sheet initially, as the company has not yet consumed the value for which the payment has been made. As the benefit from the payment is realized over time, the expense is proportionally moved from the asset account to an expense account in the relevant periods. For example, prepaid rent covers future months, and the amount corresponding to each month is expensed progressively. Similar examples include prepaid insurance premiums and prepaid subscription fees. Managing prepayments correctly is crucial for reflecting true expense allocations and asset valuations in financial statements, especially during month-end closings for accurate reporting. Prepayments ensure future obligations are met, and they are regularly reviewed during balance sheet reconciliations to match their usage or benefit period.