What is the 12-Month Rule for Prepaid Expenses?

The 12-month rule for prepaid expenses states that expenses paid in advance can generally be recognized as an expense on the income statement within 12 months of payment. If the prepaid expense benefits the business beyond this period, it remains classified as a long-term asset on the balance sheet until fully expensed. This rule helps ensure that expenses are matched with the periods in which they contribute to generating revenue, maintaining accuracy in financial reporting.