What is prepaid and absorbed?

Answer 1

Prepaid refers to expenses that are paid in advance for goods or services to be received in the future, such as insurance premiums or rent. These amounts are initially recorded as assets on the balance sheet and then expensed over time as the benefit is realized. Absorbed, on the other hand, typically pertains to costs that are allocated or covered by a company’s operations, often in the context of overhead or fixed costs being accounted for in product pricing or inventory valuation. Together, these concepts illustrate how businesses manage cash flow and expense recognition.