Is Prepaid Rent a Current Asset? Is It Debit or Credit

If you need a quick way to remember what’s considered non-current, think property, plant, equipment, and intangible assets. Assets that fall within these four categories often cannot be sold within a year and turned into cash quickly. Current assets will turn into cash within a year from the date displayed at the top of the balance sheet. A balance sheet is a financial statement that shows a business‘ assets and how they’re financed, through debt or equity.

When rent is paid in advance of its due date, prepaid rent is recorded at the time of payment as a credit to cash/accounts payable and a debit to prepaid rent. When the future rent period occurs, the prepaid is relieved to rent expense with a credit to prepaid rent and a debit to rent expense. 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 expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid for in advance.

Prepaid Rent Expense or Asset?

It can make things much easier for those who are on tight budgets or struggling financially during hard times. Overall, prepaid rent represents an important financial tool that helps landlords and tenants what is property, plant, and equipment pp&e alike manage their contractual obligations more effectively over time. It provides an option to help both parties better track their assets and liabilities throughout their rental relationship.

Cash is the most liquid asset of an entity and thus is important for the short-term solvency of the company. The cash balance shown under current assets is the balance available with the business. It typically includes coins, currencies, funds on deposit with bank, cheques and money orders. The prepaid rent will record as the current assets on the company balance.

Prepaid Rent

These kinds of goods or services that are paid for in advance cannot be expensed immediately because the expense would not line up with the benefit incurred over time from using the asset. Prepaid rent, which is our main focus is a type of prepaid expense and as such is an example of a current asset. The prepaid rent is recorded initially as an asset, but its value is expensed over time onto the income statement.

Therefore, these trading securities need to be recorded at their fair value post the initial acquisition. And the change in their value therefore reflects in the income statement of the company. Prepaid rent can be a great way to avoid the need for paying monthly rental fees. Unfortunately, it comes with certain drawbacks that tenants should be aware of before deciding to accept the option. Make sure you have all the relevant documents, such as invoices and receipts, to prepare and enter the prepaid rent into your balance sheet accordingly. If the lease payment is variable the lessee cannot estimate a probable payment amount until the payment is unavoidable.

Why is prepaid rent an asset?

We know that prepaid rent represents the amount of expense that will be due in future periods. Besides, the categorization of advance rent in current and non-current assets is also significant. Therefore, let’s answer the question by differentiating between the current and non-current assets and current assets and liabilities. With amortization, the amount of a common accrual, such as prepaid rent, is gradually reduced to zero, following what is known as an amortization schedule. The expense is then transferred to the profit and loss statement for the period during which the company uses up the accrual.

Prepaid expenses aren’t included in the income statement per Generally Accepted Accounting Principles (GAAP). Thus, prepaid expenses aren’t recognized on the income statement when paid because they have yet to be incurred. Prepaid expenses are payments made for goods or services that will be received in the future. Instead, prepaid expenses are first recorded on the balance sheet; then, as the benefit of the prepaid expense is realized, or as the expense is incurred, it is recognized on the income statement. Prepaid rent—a lease payment made for a future period—is another common example of a prepaid expense. An organization makes a cash payment to the leasing company, but the rent expense has not yet been incurred, so the company must record the prepaid rent.