Since prepaid rent is found on the balance sheet as an asset, it is a permanent account. However, once the prepaid rent has been used up, the expense is recorded on the income statement as rent expense. Prepaid rent is not initially recorded on an income statement in accordance with the Generally Accepted Accounting Principles (GAAP), and as such are not temporary accounts.
Obotu has 2+years of professional experience in the business and finance sector. Her expertise lies in marketing, economics, finance, biology, and literature. She enjoys writing in these fields to educate and share her wealth of knowledge and experience. As mentioned earlier, Prepaid Expenses are mentioned on the Balance Sheet as a Current Asset. Other Current Asset types include Inventory, Accounts Receivable, and Cash and Cash Equivalents.
Prepaid rent as a current asset account
Assets and expenses are both increased by debits or decreased by credits. Liabilities, equities, and revenue are all increased by credit and decreased by debit. Prepaid Expenses are found on almost every financial statement across different companies.
In this article, we will discuss what type of account prepaid rent is and how it is recorded. Most prepaid expenses appear on the balance sheet as a current asset unless the expense is not to be incurred until after 12 months, which is rare. The GAAP matching principle requires accrual accounting in particular, which demands that expenses and revenue must be recorded in the same accounting period as incurred no matter when cash is exchanged.
Normal Balance and the Accounting Equation
This is why, as prepaid rent is yet to be incurred, it is not reported on the income statement when paid but recorded on the balance sheet as a current asset. Prepaid rent is classified as a current asset account because it is the amount of rent that is paid in advance in leasing a place, which would be used up or expire in the future within one year. As a current asset, prepaid rent usually provides value to a business over several accounting periods (usually six months or a year).
It is said to be a permanent account because it is reported as an asset on the balance sheet. The accounts that are reported on the balance sheet such as assets, liabilities, and equity accounts are said to be permanent accounts. They are considered permanent accounts because they continue to maintain ongoing balances over time and are not closed at the end of the accounting period. Prepaid rent is rent paid prior to the rental period to which it relates.
How are prepaid expenses recognized on the balance sheet?
Generally speaking, the balances in temporary accounts increase throughout the accounting year. At the end of the accounting year the balances will be transferred to the owner’s capital account or to a corporation’s retained earnings account. Each of the accounts in a trial balance extracted from the bookkeeping ledgers will either show a debit or a credit balance. The normal balance of any account is the balance (debit or credit) which you would expect the account have, and is governed by the accounting equation. There would be no changes to the total assets because while the prepaid rent asset account increases by $5,000, the cash amount asset is decreased by $5,000.
- You are entitled to a 30 day Notice of Eviction for a nonpayment case, or a 90 day Notice of Eviction for a holdover case.
- So long as you credit and debit the right accounts by the right amounts, you shouldn’t run into any problems.
- By June, she was more than $3,000 behind on her rent, unable to pay any of the $525 she owed monthly.
- The landlord can try to argue to the court that the you didn’t pay the rent in bad faith and that the eviction should still take place.
- It is an asset because the amount paid in advance can be used in the future to reduce rent expenses when incurred.
These accounts normally have credit balances that are increased with a credit entry. 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. When an account has a balance that is opposite the expected normal balance of that account, the account is said to have an abnormal balance. For example, if an asset account which is expected to have a debit balance, shows a credit balance, then this is considered to be an abnormal balance. The accounting treatment is different under the cash basis of accounting, where expenses are only recorded when payment is issued.
Accounts with balances that are the opposite of the normal balance are called contra accounts; hence contra revenue accounts will have debit balances. For reference, the chart below sets out the type, side of the accounting equation (AE), and the normal balance prepaid rent normal balance of some typical accounts found within a small business bookkeeping system. So for example there are contra expense accounts such as purchase returns, contra revenue accounts such as sales returns and contra asset accounts such as accumulated depreciation.
The prepaid account will always be listed as an asset or liability on a balance sheet. Accounting for your prepaid rent expenses doesn’t need to be complicated, but it is something https://www.bookstime.com/ that requires your attention at the end of the month. The accountant or bookkeeper records the prepaid asset to the balance sheet account with a basic general ledger system.
Example of Prepaid Rent Accounting
A business will record prepaid rent as an asset on the balance sheet because it represents a future benefit that is due to the business. Then, the prepaid rent value would decrease as the benefits of the advanced rent payment are realized over time, and the amount used up would be expensed to the income statement. Hence, prepaid rent is first recorded as a current asset on the balance sheet and as it is used up, it is recorded as an expense on the income statement. To create your first journal entry for prepaid expenses, debit your Prepaid Expense account. This account is an asset account, and assets are increased by debits. Credit the corresponding account you used to make the payment, like a Cash or Checking account.
- Already, homeless shelters have been adding beds in preparation for an influx of people in need of a safe place to live.
- Thus, a rent payment made under the cash basis would be recorded as an expense in the period in which the expenditure was made, irrespective of the period to which the rent payment relates.
- Prepaid Expenses are found on almost every financial statement across different companies.
- She’d envisioned raising her children in their current neighborhood, where they have a park, schools and grocery stores nearby.
- Therefore, the balance sheet reflects the unexpired costs of the prepaid expenses, while the income statement reflects the expired costs.