Paid now, used later
When you pay for something that covers future months, the payment is not yet a cost of this period. It is closer to a right to receive a service, so accountants usually record it as a current asset on the balance sheet. Each month, a portion moves out of that asset and into expense, which keeps the income statement matched to the period the service was actually used.
Common prepaids include annual insurance premiums, rent paid ahead, software subscriptions, licences and memberships, and deposits for future services. A deposit that is refundable or tied to a future delivery can raise separate questions, so describe it clearly when you pass the records along.
An illustrative example
Suppose a business with a December 31 year-end pays $2,400 on October 1 for a 12-month software subscription. By year-end, three months have been used. The books should show $600 of software expense for the year and $1,800 of prepaid expense on the balance sheet, which becomes expense next year. The figures are illustrative only.
The CRA gives a similar rent example: prepay a full year of store rent on June 30 with a December 31 year-end, and only the half that relates to the current year is deducted in that year, with the rest deducted the next year.
How the tax rules treat it
The CRA explains that, under the accrual method, you claim a prepaid expense in the year or years you get the benefit. Under the cash method, you generally deduct expenses when you pay them, but a prepaid amount relating to a tax year two or more years after the year of payment cannot be deducted, other than for inventory. Most businesses report income on the accrual method, while farmers, fishers and self-employed commission agents may choose cash, so your accountant will confirm which applies to you.
Paying a large bill in December does not automatically create a deduction for the whole amount. Timing a purchase around year-end is a planning conversation, not a shortcut.
What to discuss with your accountant
Bring the invoices for any annual or multi-month payments made near year-end, showing the coverage dates. Ask which items should be spread across periods, whether a small balance is worth tracking separately, and how your reporting method affects the claim.
A common mistake is expensing the full payment on the day it is paid and never revisiting it, which overstates this year’s costs and understates next year’s. For the matching entries, see accrued expenses, which is the opposite case of a cost recognized before it is billed.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- Accounting for your earningsCanada Revenue Agency
- Business expensesCanada Revenue Agency
- What is a balance sheet?BDC
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.