Prepaid expenses

Prepaid expenses are payments made in advance for a product or service that will be consumed or used at a later date. 

When a company prepays for hotel rooms, flights, conference packages, rental cars, or insurance, the payment is initially recorded as a prepaid asset. 

Only once the service is consumed (e.g., after the employee checks out of a hotel) does the company convert that prepaid amount into an actual travel expense. This provides clearer financial reporting and prevents overstating costs in the period when the payment was made.

Another example is a tour operator may prepay for flights or lodging months in advance to build a travel package that will later be sold to customers. In each case, the prepaid amount becomes an asset until the travel occurs.