Prepaid rent is an amount for rent which has been paid in advance.
A business has an annual office rent of 12,000 and pays the landlord 3 months in advance on the first day of each quarter. On the 1 April it pays the next quarters rent in advance of 3,000 to cover the months of April, May and June. It has a prepaid rent of 3,000.
The recording of the prepaid rent is in two parts:
- The payment of cash to create the prepayment on the 1 April.
- The adjusting entry at the end of March to reflect the rent expense of 1,000 for that month.
1. Prepaid Rent Payment Journal Entry
To record the payment of cash which created the pre paid rent, the accounting records will show the following bookkeeping entries on 1 April:
| Account | Debit | Credit |
|---|---|---|
| Prepaid rent account | 3,000 | |
| Cash | 3,000 | |
| Total | 3,000 | 3,000 |
Prepaid Rent Payment Bookkeeping Entries Explained
Debit – What came into the business
An asset came into the business. The business has paid the rent in advance and has the right to use the premises for the following three month period of April, May, and June. The pre paid rent account is a balance sheet account shown under the heading of current assets.
Credit – What went out of the business
Cash went out of the business to make the prepayment.
The Accounting Equation and Prepaid Rent
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
In this case one asset (pre paid rent) has been increased by 3,000 and the other (cash) has been reduced by a similar amount.
2. Prepaid Rent Journal Entry
At the end of April one third of the prepaid rent expense (1,000) will have been used up as the business has used the premises for that month.
The rent repayment is calculated as follows.
Period of rent prepayment = 3 months Amount paid = 3,000 Period of accounts = 1 month Rent prepayment for the period = 3,000 x 1/3 = 1,000
This must now be become an expense in the income statement for April, the pre paid rent accounting is as follows:
| Account | Debit | Credit |
|---|---|---|
| Rent expense | 1,000 | |
| Prepaid rent account | 1,000 | |
| Total | 1,000 | 1,000 |
Prepaid Rent Bookkeeping Entries Explained
Debit – What came into the business
The business had use of the premises for one month, and this is now an expense for the month of April.
Credit – What went out of the business
The pre paid rent (asset) has been reduced. At the end of April, only two months (May and June) have now been paid in advance
This journal would be repeated at the end of May and June until the pre paid rent of 3,000 has been charged as an expense to the income statement and the pre paid rent account balance has been reduced to zero.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
In this case the asset (pre paid rent) has been reduced by 1,000 and the income statement has a rent expense of 1,000. The expense in the income statement reduces the net income which reduces the retained earnings and therefore the owners equity in the business.
Further details on the treatment of pre paid rent can be found in our prepaid expenses tutorial.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.