What is Rent Paid In Advance / Prepaid Rent - Journal Entry

We already discussed about Adjustments In Accounting in our previous article, but here we particularly concerned about Prepaid Rent 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 that the company which doing the business of Real Estate and gives offices on rent and charges monthly rent for giving the offices. The Real Estate company also receives the amount of rent in advance from the company getting the office on rent. This rent is Prepaid rent for the company getting the office on rent and Outstanding Rent for the Real Estates company. From the point of view business, it is a Current Asset for the Company getting office on Rent 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 / Rent Paid In Advance

The rent which is paid during the month or current year but the services or benefits against it are not yet received is Rent paid in Advance or Unexpired Rent.

Example

Let Say that, the business acquired the building office on rent from Real Estate Company on 1^st March 2016, for Rs. 2000 Per Month. The company paid rent for the 18 months and total paid rent amount is Rs. 2000 x 18 = Rs. 36000. We know the Accounting Period ends on 31st December (in this case), so the company paid Rent in Advance for the Month 1^st January To 31^st August, 2017 and it is equal to 2000 x 8 = Rs. 16000. This rent 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 1^st January To 31^st 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 Rent 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.

                                                         You Can Also Read Out, "What is Rent Received In Advance"

What Are The Adjusting Journal Entries For Rent Paid In Advance?

1. When Rent Paid In Advance Initially recorded as An Expense 

2. When Rent Paid In Advance Initially recorded as An Asset

1. For Point 1. we record the Rent As an Expense account and whole amount Credited to Cash Account. Considering the example above, we have

Rent a/c 36000

                     Cash a/c 36000

As, we know for the Current Accounting Period, Rent paid for 8 month is that rent for which the business received the benefits in the current accounting period is Rs. 16000 and the rent 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 Prepaid Rent. So, at the end of Accounting Period we record the following Prepaid Adjusting Journal Entry.

Prepaid Rent a/c 20000

                                Rent a/c 20000

Prepaid Rent is a Current Asset, so it goes to Balance Sheet on Assets Side under the head of Current Assets. Rent 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 of rent to Prepaid Rent by debit it and Credit the amount of Cash. As we paid the rent 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.

Prepaid Rent a/c 36000

                             Cash a/c 36000

At the end of Current Accounting Period, we transfer that portion of Rent against which we received benefits or services from Real Estate company to Rent A/c by debit it and Credit Prepaid Rent A/c. Below is the following Adjusting Entry:

Prepaid Rent Expired Journal Entry

Rent a/c 16000

                                      Rent Paid In Advance a/c 16000

Rent paid in advance a/c goes to Balance Sheet on Asset Side Under the Head of Current Assets and Rent is closed By passing Closing Journal Entries and its amount is transferred to Profit & Loss Account or Income Statement.

Under both methods, Prepaid Rent goes to Balance Sheet with Rs. 20000 and Rent 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 Prepaid Rent is given below:

1. Is Prepaid Rent Debit or Credit?

The Normal Balance of Prepaid Rent 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 Prepaid Rent An Asset ( or A Current Asset) or Equity

OR

Prepaid Rent is What Type of Account

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 Prepaid Rent is the advance amount paid to outsiders of the business.

3. Is Prepaid Rent 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"