closing

prepaid expense

A prepaid expense is a cost that has been paid in advance for a period that extends beyond the closing date. In proration, if the seller has already paid an expense such as annual property taxes or a homeowners association fee for time the buyer will own the property, the buyer reimburses the seller for that unused portion. On a closing statement it is shown as a credit to the seller and a debit to the buyer.

Exam tip
Prepaid by seller = seller credit, buyer debit. Accrued (unpaid) expense = seller debit, buyer credit. Keep the direction straight.
Example
A seller paid $3,600 in annual taxes for the calendar year and closes June 30. The buyer reimburses the seller $1,800 for July through December.

Related terms & state variants

Sources

Source verification pending. Confirm current requirements with your state regulator.

Last verified: 2026-10-23