The adjusting journal entry for a prepaid expense, however, does affect both a company’s income statement and balance sheet. The adjusting entry on January 31 would result in an expense of $10,000 (rent expense) and a decrease in assets of $10,000 (prepaid rent). Prepaid rent is rent paid prior to the rental period to which it relates. Rent is commonly paid in advance, being due on the first day of that month covered by the rent payment. The landlord typically sends an invoice several weeks early, so the tenant issues a check payment at the end of the preceding month in order to mail it to the landlord and have it arrive by the due date. Therefore, a tenant should record on its balance sheet the amount of rent paid that has not yet been used.
This category includes payments not yet received from customers for sales made on credit terms. Because accounts receivable are not yet truly in the bank, there is a chance that they never will be received. In the course of daily operation, many firms set aside money prepaid rent for goods or services before receiving them. These include items like employee labor, which the company records into a prepaid salaries account until it cuts pay checks. Further details on the treatment of pre paid rent can be found in our prepaid expenses tutorial.
How to Record Prepaid Expenses in Balance Sheets?
Not only prepaid rent but all other prepaid expenses are recorded as an asset on the balance sheet. The balance sheet provides valuable information about the company, using it in combination with the cash flow statement and income statement will provide more clearer picture of the company. This journal entry is completed to establish your Prepaid Insurance asset account that represents the https://www.bookstime.com/ prepaid amount. Remember, to track prepaid expenses properly, they need to be recorded in your general ledger as a prepaid expense asset, with a portion of the prepaid asset accounted for each month as an expense. When January comes around, you would then debit $2,000 as rent expense for January and credit your prepaid rent expense account for $2,000, leaving you with a balance of $22,000.
Therefore, the amount of prepaid rent that will be presented on the Balance Sheet at the year-end 31 December 2019 amounts to $2,400. This is going to be represented as Prepaid Rent under the Current Assets. As per the agreement with the landlord, they were supposed to pay an advance rent of 2 years (up to 31 December 2020).