How are Prepaid Expenses Recorded in the Financial Statements?

Prepaid expenses are initially recorded on the balance sheet as assets, reflecting the amount paid in advance for future goods or services. Over time, as these expenses are consumed or utilized, they are gradually expensed through adjusting entries. The portion of the prepaid expense that has been used up is transferred from the balance sheet to the income statement as an expense, ensuring that financial statements accurately reflect the timing of expenses incurred.