Rent Accounting for ASC 842: Prepaid Rent, Journal Entries, and More

Amortization means the allocation of the cost of an asset over its assets = liabilities + equity useful life. After the 6 months, the company runs out of prepaid rent, and therefore incurs a rent expense of $12,000 and cancels out the prepaid rent of $12,000. A business has an annual premises rent of 60,000 and pays the landlord quarterly in advance on the first day of each quarter.

• While prepaids and expenses are related, they are distinctly different.
• Prepaid expenses are recognized as an asset because they provide future economic benefits to a company.
• Take note that the amount has not yet been incurred, thus it is proper to record it as an asset.
• The prepaid expense account is also called a prepaid account or a prepaid balance.
• This financial document delineates the cash inflows and outflows from core business operations, investing activities, and financing activities.

Prepaid Rent: Asset Or Liability

Note that the companies listed below accept prepaid cards https://www.bookstime.com/ as payment for a rental, but they do not allow you to book a reservation with a prepaid card, unless otherwise noted. Before diving into the wonderful world of journal entries, you need to understand how each main account is affected by debits and credits. Again, anything that you pay for before using is considered a prepaid expense. Therefore, the entry on the liability side is a debit to Lease Expense for $3,251 and a credit to Lease Liability for the same amount. The entry for the ROU asset is a debit to Lease Expense for $33,469 and a credit to Right-of-use (ROU) Asset for the same amount to record the amortization.

Reporting Prepaid Rent in Financial Statements

We will explain the rules and concept, provide a detailed amortization schedule, and walk through the treatment with journal entry examples. In that case, the amount of rent for one month will be subtracted from the prepaid rent recorded on the balance sheet. Once the rent expense is due and incurred, the rent expense is recorded in the income statement of the respective financial year. Both assets and liabilities are recorded in an entity’s balance sheet and represent a company’s financial health snapshot. A common concern of business owners who do accounting by themselves is whether the prepaid rent is an asset or a liability.

Accounting Entries for Prepaid Rent

The balance sheet must accurately reflect this asset to provide a clear picture of the company’s financial position. As time progresses and the rental period elapses, the value of the prepaid rent asset decreases. This decrease is matched with a corresponding rent expense on the income statement, reflecting the usage of the rental space over time. The systematic reduction of the prepaid rent asset is crucial in matching expenses with the periods in which they are incurred, adhering to the matching principle of accounting.

When a business pays for these expenses in advance, they are recorded as assets on the balance sheet. Under ASC 842 base rent is included in the establishment of the lease liability and ROU asset. The amortization of the lease liability and the depreciation of the ROU asset are combined to make up the straight-line lease expense. Similarly to ASC 840, this straight-line lease expense is calculated as the sum of all of the rent payments over the lease term and divided by the total number of periods. A full example with journal entries prepaid rent credit or debit of accounting for an operating lease under ASC 842 can be found here. This means debiting the rent expense account and crediting the prepaid rent account.