![]() ![]() ![]() Suppose that Company A makes a prepaid rent payment of $5,000 on December 28, 2020. ![]() It appears as if the company has more money than it really does and has spent less than it really has. If a company fails to account for rent expenses by reducing the prepaid rent, as shown above, the total assets get overstated while the total expenses are understated. The journal entry shows an adjust prepaid rent balance after the rental payment is taken out, as follows: The company makes a journal entry debiting the rent expense account and crediting prepaid rent to account for the monthly rent payments. Therefore, this journal entry covers increasing one asset (the prepaid rent) and decreasing another asset (the cash account). This example journal entry doesn’t involve the income statement account because both the prepaid rent and cash amount go on the balance sheet. Prepaid Rent Journal Entry ExampleĪs mentioned before, a company makes a prepaid rent journal entry by debiting a prepaid rent account and crediting a cash account after making the advanced payment. The process is repeated as many times as necessary across the accounting period. One rent payment goes from the prepaid rent asset account to the rent expense account as the months pass. The prepaid rent asset account gets debited for the same amount of money. The cash on the balance sheet is credit and reduced accordingly. Example of Prepaid Rent AccountingĬompany A pays six months of rent in advance. While prepaid rent and rent expenses are related, they remain significantly different and are recorded differently. When the payments go through, and the prepayment is reduced, the expense is recorded on the income statement. The prepaid account will always be listed as an asset or liability on a balance sheet. Prepaid rent generally covers multiple rent payments at once, while a rent expense only covers a single payment. The key difference between prepaid rent and rent expenses is that prepaid rent is a balance sheet account while rent expenses go on the income statement. It causes misleading financial information that affects your ability to make informed business decisions. Failing to classify prepayments on a balance sheet causes all manner of problems. It’s vital that business owners, accountants, and managers understand the distinction between prepaid rent as an asset or liability. The payment becomes a liability when a company is given prepayment from tenants or third parties. Prepaid rent payments are classed as an asset when the organization makes a prepaid rent payment to a landlord or other third party. What type of account is prepaid rent? Is it an asset or liability? It depends on which side of the equation your company is on. Some things still require a human touch, including prepaid rent on balance sheet entries. Automation is a great idea, but it isn’t perfect. While some accounting systems automate the amortization of a prepaid rent payment, you should always check the account at least once per accounting period. From there, accountants include a monthly entry to reduce the prepaid expense account and record the rent expense. This could mean having to adjust the entry to reclass the rent expense to a prepaid account. The accountant or bookkeeper records the prepaid asset to the balance sheet account with a basic general ledger system. Published by Alex on Prepaid Rent and AccountingĪccounting for your prepaid rent expenses doesn’t need to be complicated, but it is something that requires your attention at the end of the month. ![]()
0 Comments
Leave a Reply. |