Prepaid rent expense exists as an asset account that indicates the amount of rent a company has paid in advance. After a prepaid rent expense gets recorded in the general journal, a company must make an adjustment to indicate the amount of rent used during a specific period of time. Rent is the amount paid for the use of property not owned by the company, as explained by the Internal Revenue Service website. The calculation of prepaid rent expenses depends on the amount of a company’s monthly rent. For instance, a company that prepays $12,000 for a one-year lease must credit cash for $12,000 and debit prepaid rent for the same amount.
Divide the total amount of prepaid rent by the applicable number of months. For example, a company that prepaid $12,000 for the year must divide $12,000 by 12 months. This calculation indicates the amount of rent the company must pay on a monthly basis. In this scenario, the company must pay $1,000 per month for rent. The month of the journal entry determines the calculation for prepaid rent expense.
Write the date of the transaction. For instance, if the company writes the entry on September 30th, the same date must be indicated in the general journal. Multiply the number of months times the monthly rent expense. The result, in this case $9,000, represents the amount of prepaid rent the company has used as of September 30th.
Write a debit for the rent expense account. For example, a company that pays $1,000 a month for rent debits rent expense in the amount of $9,000, as of September 30th. Debiting the rent expense account increases the amount of rent expense while a credit to rent expense indicates a decrease in the rent expense account.
Write a matching credit in the prepaid rent expense account. For instance, a company that pays $1,000 a month for rent must credit the prepaid rent expense account for $9,000, as of September 30th. This indicates the company has three months or $3,000 of prepaid rent left to use. Crediting the prepaid rent expense account causes a decrease in the account while a debit to prepaid rent expense causes an increase. Notice in each transaction, every debit entry has a matching credit entry for the same dollar amount.
- IRS: Rent Expense
- Net MBA: Adjusting Entries
- Principles of Accounting: Income Measurement
- Simple Studies: Double-Entry Accounting System
- Corporate Finance Institute. "Prepaid Expenses." Accessed April 10, 2020.
- Internal Revenue Service. "Publication 538: Accounting Periods and Methods," Pages 10-11. Accessed April 10, 2020.
Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.