Instructor Blog - Credit College - Credit Basics

Q: Why would prepaid expenses be taken out of current assets in the calculation of working capital?

A: Prepaid expenses are payments made in advance for expenses to be incurred, or used, during the operating period. Since the company spent the cash in creating the prepaid expense, there is virtually no way it could ever recoup the cash it spent. In other words, it cannot convert this current asset to cash in the coming period, since it spent cash to create the asset. The cash is already out the door.

Consequently, it is quite common to remove prepaid expenses from current assets in computing working capital.