In accounting, a prepaid rent account is an asset if you are renting the property or a liability if you are the landlord. You must adjust the account at the end of each payment period to keep your records current using a deferral adjusting entry. If you do not adjust your entries each period, it can be difficult to determine how much money to return to the entity renting your property if you must refund a portion of the rent.
Open your ledger of accounts to the prepaid rent account. As a landlord, you entered the prepaid amount as a credit to your prepaid rent account and a debit to your cash account. As you perform your monthly adjustments, you move the paid rent to your cash account.
Apply a credit for rent to your cash account. For example, if the tenant paid $8,400 rent for a year upon moving into the property, enter a credit for $700.
Enter a debit in your prepaid rent account in the same amount that you credited to your cash account. For example, if your monthly rent income is $700, debit your prepaid rent account for $700.
A double-entry accounting system requires that for every debit you enter, there is a credit that offsets the debit amount. Typically, accounting software will enter the credit entry automatically when you enter the debit transaction.
Tenant laws in states such as Maryland require that you keep security deposits in a separate account.