Journal entry for prepaid rent is Debit the Prepaid Rent Account and Credit the Cash/Bank Account. and second entry for adjusting of Prepaid Rent is Rent Expense Account Debit and Prepaid Rent Account Credit. Prepaid rent is an current asset that has been paid in advance for a future period so It is recorded as an asset on the balance sheet side because it represents a benefit that the company will receive in the future and also for book of expenses.
Example Scenario
Let’s assume a company pays ₹60,000 on 01-07-2024 for rent covering for the next six months (July to December 2024).
Journal Entry to Record Prepaid Rent
| Date | Account Title | Debit (INR) | Credit (INR) |
|---|---|---|---|
| 01-07-2024 | Prepaid Rent | 60,000 | |
| 01-07-2024 | To Cash/Bank | 60,000 |
Explanation:
- Prepaid Rent Account Debit: Increases the prepaid rent account, which is current Asset and recognizing the payment as an asset.
- Cash/Bank Account Credit: Decreases the cash/bank Balances for reflecting the outflow of cash/bank balances for rent payment.
Adjusting Entry When Rent is Recognized as Expense
At the end of each month, a portion of the prepaid rent is recognized as an expense.
Example Scenario
At the end of July 2024, ₹10,000 (₹60,000/6 months) of the prepaid rent account will be recognized as an expense. i.e. reduce of Prepaid Rent Account.
Journal Entry to Adjust Prepaid Rent
| Date | Account Title | Debit (INR) | Credit (INR) |
|---|---|---|---|
| 31-07-2024 | Rent Expense | 10,000 | |
| 31-07-2024 | To Prepaid Rent | 10,000 |
Explanation:
- Rent Expense Account Debit: Increases the rent expense account, which is shown in profit & loss for reflecting the rent cost for the month.
- To Prepaid Rent Account Credit: Decreases the prepaid rent account, reducing the current asset as it is for book expense. Prepaid rent is an current asset.
Summary
- Initial Prepaid Rent Payment:
- Prepaid Rent Account Debit: Recognizes the advance payment as an asset.
- Cash/bank Account Credit: Reflects the cash/bank outflow.
- Monthly Rent Expense Recognition:
- Rent Expense Account Debit: Recognizes the rent expense for the period.
- Prepaid Rent Account Credit: Adjusts the prepaid rent to reflect the consumption of the benefit.
This process ensures that the rent expense is matched to the correct accounting periods, adhering to the accrual accounting principle.