Final answer:
A prepayment such as prepaid rent is an asset. It represents the right to receive a future economic benefit for which payment has already been made. In contrast, a liability is an obligation to pay and does not apply to prepayments.
Step-by-step explanation:
A prepayment is considered an asset because it represents a future economic benefit. Prepayments, such as prepaid rent, are payments for goods or services that will be received in the future. Since the individual or business has made a payment in advance, they have the right to receive the service or benefit at a later date, which fits the definition of an asset. A liability, on the other hand, is an obligation to pay money to another party and would not describe a situation where you have already paid for future services.
For instance, if you prepay rent for six months, you have an asset because you have the right to use the property for the next six months without additional payment. Banks also deal with assets and liabilities, such as loans and deposits. A loan given by a bank is an asset for the bank, as it represents money that will be repaid with interest, while deposits are liabilities because they are funds the bank owes to its depositors.