Prepaid expenses are costs paid in advance — before using the goods or services. On the balance sheet, they are a current asset representing future value already paid for.
Common examples include insurance premiums, rent, and annual software subscriptions. If you pay $12,000 for a one-year insurance policy in January, you recognize $1,000 per month as it is used.
This follows the matching principle — expenses are recorded in the period they benefit, not when cash is paid.