As noted above, prepaid expenses are payments made for goods and services that a company intends to pay for in advance but will incur sometime in the future. Examples of prepaid expenses include https://www.bookstime.com/ insurance, rent, leases, interest, and taxes. The business has paid the rent in advance and has the right to use the premises for the following three month period of April, May, and June.
Prepaid rent refers to payments made by a lessee for a lease period that has not yet occurred. This advance payment is common in lease agreements and requires specific accounting treatment. This journal entry is called a prepaid expense journal entry, and it shows the initial payment for the prepaid expense. The prepaid expense prepaid rent accounting account is also called a prepaid account or a prepaid balance. After his journal entry, the balance of prepaid rent will become zero ($5,000 – $2,500 – $2,500) while rent expense increases to $5,000 ($2,500 in January + $2,500 in February). Following are the steps for recording the journal entry for rent paid by cheque.
Example of a Prepaid Expense
Under ASC 842, prepaid rent is now included in the ROU asset instead of being accounted for in a separate Balance Sheet account. If the lessee’s organization decides to make a payment before it’s due, there may continue to be an outstanding balance in the clearing account until the lease accounting entries catch up. Oftentimes, this entry should not be adjusted in lease accounting software and will clear itself up in the following month. When it comes to accounting for leases under ASC 842, one area that can be confusing is prepaid rent.
The pre paid rent account is a balance sheet account shown under the heading of current assets. If the lease agreement defines the rent payments as contingent upon a performance or usage but also includes a minimum threshold, the minimum is used in the calculation of the lease liability. Because of the inclusion of the minimum threshold, the lessee has a commitment to pay at least the lower amount regardless of actual performance or usage.