A prepaid expense is a payment that will benefit a future period. A prepaid can be distinguished from a deposit, which is essentially a loan, although sometimes a "deposit" might be considered a prepaid expense where the deposit will eventually be used to offset a future expense, for example a deposit that secures a banquet hall may be used cover the cost of the hall. A prepaid might be recorded when there is a proration of an expense that benefits more than one period; a payment for insurance may benefit a period beyond the fiscal year: setting up a prepaid for the portion relating to the next fiscal year facilitates the appropriate matching of the expense with the period of benefit.
A prepaid expense would be classified as a current asset. However, a payment may benefit a period beyond one year of the balance sheet date. A payment benefiting a period greater than one year would be classified outside of current assets.