Is Prepaid Expense a Liability or Expense?

Prepaid expense is initially recorded as an asset on the balance sheet because it represents a payment made in advance for future goods or services. As the prepaid expense is used or consumed, it is gradually expensed over time through adjusting entries, moving it from the balance sheet to the income statement. Therefore, while prepaid expense starts as an asset, it ultimately becomes an expense once it contributes to generating revenue or supporting operations.