Which item is most likely classified as a prepaid expense?

Prepaid expenses represent payments made in advance for goods or services that will be received in the future. These expenses are recorded as assets on the balance sheet until the benefit of the payment is realized over time, typically as the goods or services are consumed or utilized.

In this case, rent paid in advance for the upcoming year clearly fits the definition of a prepaid expense. This is because the payment is made before the rental period begins, and the benefits of the rental space will be received over the course of the following year. As the months pass and the space is used, the prepaid rent will then be expensed gradually in the income statement, reflecting the period over which the business benefits from using the rented space.

The other options provided do not fit the criteria for prepaid expenses. Utilities bills paid monthly represent current expenses incurred within the month and do not constitute prepayment. Salaries paid to employees for the current month are also current expenses related to that month’s work, thus not classified as prepaid. Lastly, commissions owed to sales staff represent liabilities or obligations that will be settled in the future, rather than an advance payment for future benefits.