In the accrual accounting world you are required to record paid for costs, when they are physically used. Forking out for things like rent and insurance premiums up front are good examples of this. A prepayment is considered an asset because it represents a cost that hasn't been used up yet.

The remaining balance of the rent or insurance premium you paid for up front.

Let's say you paid £1,200 up front for your indemnity insurance premium on the 31st of March that covers you for the whole year. If the end of your financial year is the 30th of June, you will have only used up £300 worth of the insurance. Therefore instead of recognising the entire £1,200 that you paid in the given year, you need to allocate £900 of it to the prepayments category. Once you have done this for the year you lodge your accounts, in the following year you will need to move the £900 back in to your expenses so you can claim the reduction to your taxable profits.

Other big payments for fixed assets need to be allocated to the relevant fixed asset category and depreciated accordingly. Items like: