Prepaid Expenses Require What Type of Adjusting Entry

Prepaid Expenses or Expenses Paid In Advance required adjusting entry according to Matching Concept Gaap as revenues of the same period must be matched with the expenses of the same period incurred in earning these revenues.

If we initially recorded as prepaid expense and later on, when we received services or benefits against the payment, we debit the relevant expense account e.g., Rent Expense Account and credit Prepaid Rent Account which is expired for that particular accounting period. So, we match rent expense account with the revenues of that specific accounting period by recording rent expense account in Income Statement.

The entry is shown below:

                            Prepaid Expenses a/c  XXX

 

                                                              Cash a/c  XXX

 

                                     (Expenses Paid In Advance For the Period)

 

When we received a portion or whole part of benefits against advance payment paid, then we debit relevant expenses account and credit prepaid expenses account.

                                        Expenses a/c  XXX

 

                                                              Prepaid Expenses a/c  XXX

 

                                                    (Expenses Expired For The Period)

For example, we paid rent of Rs. 5000 per month to landlord. On 1^st January, 2019, we paid rent in advance for 18 Months. Then what adjusting entry is required to adjust the value of prepaid rent at the year end i.e., on 31^st December, 2019.

We know that:

 

Rent for 18 months = 5000 X 18 = 90000

 

Expired Portion: Rent for 12 Months = 60000

 

Unexpired Portion: Rent for 6 Months = 5000 X 6 = Rs. 30000

 

On 1^st January, 2019, we record the following entry:

                                       Prepaid Rent a/c  90000

 

                                                                  Cash a/c 90000

 

                                            (Prepaid Expenses Recorded In Advance)

As, we paid rent for 18 months and out of 18, we received benefits for 12 months at the end of 31^st December, 2019, so we record the following adjusting entry as shown below:

                           Rent Expense a/c  60000

 

                                                        Prepaid Rent a/c  60000

 

                                                (Rent Expired For 12 Months)