How do you amortize a prepaid expense by month?
Short answer
Divide the invoice amount by the number of service months, round to the cent, and expense that amount each month starting with the first service month. Let the final month take whatever is left so the total equals the invoice exactly. The unexpensed part stays on the balance sheet as a prepaid asset until each month's turn.
A prepaid expense is paid before the service is used: an annual software license, an insurance premium, a year of rent. It is recorded as an asset when paid and moved to expense a month at a time as the service is consumed.
What is the monthly formula?
- Monthly amount = invoice amount ÷ number of months, rounded to the cent.
- Final month = invoice amount − monthly amount × (months − 1).
- Balance at any month end = invoice amount − amortization to date.
The final-month rule exists because rounding makes the monthly amounts add up to a few cents more or less than the invoice. Giving the last month the remainder makes the total exact.
What does a worked example look like?
A 12-month software license costs 5,000.00 and starts in January.
- Monthly amount: 5,000.00 ÷ 12 = 416.666..., rounded to 416.67.
- Months 1 to 11: 11 × 416.67 = 4,583.37.
- Month 12: 5,000.00 − 4,583.37 = 416.63.
- Balance after 7 months: 5,000.00 − 7 × 416.67 = 2,083.31.
On payment, debit the prepaid asset and credit cash for 5,000.00. Each month, debit the license expense and credit the prepaid asset for that month's amount. A simple life check is monthly amount × (months − 1) + final month = invoice amount, which here is 4,583.37 + 416.63 = 5,000.00.
How do accruals fit in?
Accruals are the mirror image: an expense incurred but not yet invoiced is recorded in the month it was incurred and reversed in the following month, when the real invoice arrives. A schedule tracks both so the close shows what is still open.
What does this method not cover?
It spreads an amount evenly over whole months. Partial-month conventions and day-count methods need a different calculation, and this page is arithmetic, not accounting or tax advice. Confirm treatment with a qualified accountant.
The prepaid expense and accrual schedule applies the same rounding rule to up to 40 prepaids and shows each month's expense and the year-end balance.