Rent Paid In Advance Entry In Accounting Equation

As Rent Paid In Advance / Prepaid Rent is an example of Prepaid Expenses which are Current Assets so, it affects asset side of Accounting Equation. Moreover, it also depends upon accounting systems which are followed by a business.

1. On Accrual Basis of Accounting System

                              (Assuming That Prepaid Rent Initially recorded as an Asset)

                                                   Prepaid Rent a/c  5000

                                                                              Cash a/c  5000

                                           (Rent Paid In Advance for the Month)

We know that Accounting Equation is

                                    Assets             = Liabilities + Owner’s Equity

                         Cash + Prepaid Rent = Liabilities + Owner’s Equity

                          -5000 + 5000           =  Liabilities + Owner’s Equity

                                      0                   =  Liabilities + Owner’s Equity

At the end of the accounting period, the portion of prepaid rent which is expired is transferred to rent account. The adjusting entry to record is given below:

                                                     Rent a/c  4500

                                                                     Prepaid Rent a/c  4500

                                             (Prepaid Rent Adjusted For The Period)

On Accounting Equation, we have:

                                                Prepaid Rent = Liabilities + Owner’s Equity

                                                     -4500        =                   - 4500

As rent is an expense account which decreases the owner’s equity due to profitable activities of the owner of the business.

As the remaining amount of prepaid rent is Rs. 500, so it is shown on accounting equation as:

                                     Prepaid Rent = Liabilities + Owner’s Equity

                                    +500              = Liabilities + Owner’s Equity

2. On Cash Basis of Accounting System

When we actually paid rent, then we record the following entry for rent paid for cash as shown below:

                                                                 Rent a/c  5000

                                                                                 Cash a/c  5000

                                                                   (Rent Paid For Cash)

The effect of this Transaction on accounting equation is that Rent Account which is an expense account which decreases the owner’s equity by Rs. 5000 as expenses incurred for earning revenues and these are related with the profitable activities of the owners of the business while cash account decreases the asset side by Rs. 5000 as it is decreasing on credit side which is unfavorable for such type of account.