What Is Rent Paid In Advance | Journal Entry
We already discussed about Adjustments In Accounting in our previous article, but here we particularly concerned about Prepaid Rent (PR) Journal Entry.
Business needs property and building for carrying out the business activities. So, they either build their own buildings to establish their head office or they get the building on
rent. Here, we consider the Real Estate Business where a company which is doing the business of Real Estate and gives offices on rent and charges monthly for giving these offices. The Real Estate company also receives the amount of rent in advance
from the company getting the office on rent. This is PR for the company getting the office and Outstanding Rent for the Real Estates company. From the point of view business, it is a Current Asset for the Company getting office because the company will receive the benefits in future period of time and Current Liability for the Real Estate Company because the company is liable to provide rent facilities. Prepaid Rent is an example of Prepaid Expenses or Prepayments. It is also known as Prepayment Rent.
What Is A Prepaid Rent (PR) / Rent Paid In Advance (RPA)
It is paid during the month or current year but the services or benefits against it are not yet received is RPA or Unexpired Rent.
Example
Let Say that, the business acquired the building office on rent from Real Estate Company on 1st March 2016, for Rs. 2000 Per Month. The company paid for the 18 months and total paid amount is Rs. 2000 X 18 = Rs. 36000. We know that the Accounting Period ends on 31st December (in this case), so the company paid Rent in Advance for the Month 1st January To 31st August, 2017 and it is equal to 2000 X 8 = Rs. 16000. This is Prepaid for the 8 Months and it is a Current Asset for the company because its benefits is still not received
by the company but will receive in 8 months starting from 1st January To 31st August, 2017. The rent which is paid within the Current Accounting Period is 2000 X 10 = Rs. 20000 and it is not an Expense but a Current Asset whose benefits will be received within the current accounting period.
Now the question is how we account for R in the Form of Accounting Journal Entries. We make Accounting Journal Entry with respect to two aspects and both aspects give the same results but these are just the presentation of Accounts
in Financial Statements.
What Are The Adjusting Journal Entries For RPA?
1. When RPA Initially recorded as An Expense
2. When RPA Initially recorded as An Asset
1. For Point 1. we record the Rent (R) As an Expense account and whole amount Credited to Cash Account. Considering the example above, we have
R a/c 36000
Cash a/c 36000
As, we know for the Current Accounting Period, R paid for 8 month is that rent for which the business received the benefits in the current accounting period is Rs. 16000 and the R for 10 Months for which business still not received any benefit at all is Rs. 200000. So We record only that portion of rent for which the business still not received any benefit and it is PR. So, at the end
of Accounting Period we record the following Prepaid Adjusting Journal Entry.
PR a/c 20000
R a/c 20000
Here PR is a Current Asset, so it goes to Balance Sheet on Assets Side under the head of Current Assets. R is an expense, so it is closed by passing Closing Entries and
it is transferred to Profit and Loss a/c or Income Statement or Comprehensive Income.
2. For this method, we initially record the entire amount to PR by debit it and Credit the amount of Cash. As we paid in advance to Real Estate company,
so we treat it as an Current Asset Initially because we will receive the benefits against these Current Assets in future.
PR a/c 36000
Cash a/c 36000
At the end of Current Accounting Period, we transfer that portion against which we received benefits or services from Real Estate company to R A/c by debit it and Credit
PR A/c. Below is the following Adjusting Entry:
Prepaid Rent Expired Journal Entry
R a/c 16000
RPA a/c 16000
RPA a/c goes to Balance Sheet on Asset Side Under the Head of Current Assets and R account is closed By passing Closing Journal Entries and its amount is transferred to Profit
& Loss Account or Income Statement.
Under both methods, PR goes to Balance Sheet with Rs. 20000 and R is closed by transferring to Profit and Loss Account for Rs. 16000. So, we can say that under both methods,
the result is the same but presentation is different.
Important Questions Related To PR is given below:
Important Questions Related To PR is given below:
1. Is Prepaid Rent Debit or Credit?
The Normal Balance of PR is Debit. When it increases, we debit it and when it decreases, we credit it.You Can Also Read Out This Article, "What is the Difference Between Debit And Credit"
2. Is PR An Asset (Or A Current Asset) Or Equity?
OR
Yes, as it is used within one year, so it a Current Asset, but it is not An Equity as equity is the rights of owners of the company while PR is the advance amount paid to outsiders of the business.
3. Is PR An Asset or Expense?
Yes, it is a Current Asset but it is not an Expense as it is an advance payment paid to Rental Company and whose benefits will be received with the passage of time. For More Detail, you can Read, "Expenditures VS Expenses"
Example: $18,000 rent paid for the current month and $54,000 as advance rent (AR) by the company for the next three months by cheque. What is the journal entry to record in the books of accounts?
We either record the separate entries for rent paid by cheque / check and RPA (PR) by cheque or record a combined entry but the result should be the same under both cases as shown below:
(a). Separate Entries
R Exp. a/c $18000
Bank a/c $18000
(R paid by cheque)
PR a/c $54000
Bank a/c $54000
(AR Paid)
(b). Combined Entry
R Exp. a/c $18000
PR a/c $54000
Bank a/c $72000
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