Amortization of prepaid expenses is the process of deducting from income the cost of non-cash items that were acquired and paid for before the start of a given accounting period. Put more simply, it’s the way a business properly accounts for expenses that have been made prior to the start of an accounting period. This metric allows businesses to spread out the cost of certain purchases, such as annual insurance premiums, over the course of their term, instead of claiming the full cost in a single accounting period. Doing so gives companies an accurate reflection of their true profits while also giving them a better understanding of their current financial situation.