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Discy Latest Questions

  1. This answer was edited.

    Prepaid rent includes rent, therefore, you might be thinking that it is an expense, right? Clearing your assumption, that is incorrect. Prepaid rent is a current asset. In simple words, prepaid rent is recorded under current assets in the balance sheet because often businesses pay the rent before thRead more

    Prepaid rent includes rent, therefore, you might be thinking that it is an expense, right? Clearing your assumption, that is incorrect. Prepaid rent is a current asset.

    In simple words, prepaid rent is recorded under current assets in the balance sheet because often businesses pay the rent before the due date and it is utilized within a few months of its payment, usually within the same financial period. In the balance sheet, all the prepaid expenses that have not yet been consumed are recorded as a current asset about the time frame of one year.

    Prepaid Rent

    You can think of prepaid expenses as the costs that have been paid but are yet to be utilized. For example, prepaid rent, prepaid insurance, prepaid salaries, etc.

    When you make the payment of rent before its due date it is known as prepaid rent. Rent is usually paid in advance for multiple reasons such as availing a discount, is due on the first day of the month, the landlord demands a prepayment, etc.  For a better understanding of the concept have a look at the example given below.

    Example

    Company X signs an agreement to rent a warehouse for 1,000 per month from March for 7 months. The landlord demands for payment of the total amount in February. The journal entries to be recorded are as follows:

    FebPrepaid Rent a/cDebit7,000Debit the increase in asset
    To cash a/cCredit7,000Credit the decrease in asset

    (being rent paid)

    MarchRent Expense a/cDebit1,000Debit the increase in expense
    To prepaid rent a/cCredit1,000Credit the decrease in asset

    (being prepaid rent adjusted as it expires)

    Note: The total amount of rent (1,000 x 7) is initially recorded in the balance sheet under current assets as prepaid rent. Each month the asset account is reduced by the amount utilized. You have to decrease the asset account by 1,000 (7,000/7) and record the expense of 1,000.

    Prepaid rent as shown in the balance sheet

    (Extract of Balance sheet)

    Extract of Balance sheet

    Hope this helps.

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  1. This answer was edited.

    Firstly, Nancy, the question put up by you is a bit vague. As in it is difficult to identify whether you have an issue in understanding an accounting concept regarding a loan given or loan taken. Moving ahead, I think I can answer the question stated below in two ways Is Loan a Current Asset? Case 1Read more

    Firstly, Nancy, the question put up by you is a bit vague. As in it is difficult to identify whether you have an issue in understanding an accounting concept regarding a loan given or loan taken.

    Moving ahead, I think I can answer the question stated below in two ways

    Is Loan a Current Asset?

    Case 1: If a Loan is Given

    Firstly you have to be clear whether the loan is a Loan granted or a Debt. When an entity lends a certain amount to another person based on certain conditions agreed by the parties at the time of entering into such contract. Then such a lender will recognise this transaction as a case of Loan Given.

    Case 2: If a Loan is Taken

    When an entity or a person owes a certain amount to another person or an entity or simply put up he has borrowed a certain sum from such another person based on certain conditions agreed at the time of entering into the contract such a transaction is a case of Loan Taken for the borrower.

    To classify such loan as a Current Asset or a Current Liability, you will need to first identify the tenure of such loan given or taken i.e whether it’s a Short term Loan or a Long term Loan.

    If you want to make an accurate classification pertaining to the head under which such loan would be presented it is very important to ascertain whether its a short term or a long term loan.

    Short term Loan

    It refers to a loan taken or given for a short duration of time roughly ranging between a month and a year these are generally repaid in monthly instalments. Such Short term Loans can be classified under the heads of Current Assets or Liabilities. If you are still unable to get the concept clear the below-mentioned table can be of great help –

    ParticularsClassification
    Short term Loan TakenCurrent Liability
    Short term Loan  GivenCurrent Asset

    Long term Loan

    A loan Taken or Given shall be said to be a Long term Debt or Long term Loan Given if such a loan is not due to be repaid or received within a year. It can be classified as a Non-Current Asset or a Liability.

    Similarly, refer to the table below for a better understanding of this concept

    ParticularsClassification
    Long  term Loan TakenNon-Current Liability
    Long  term Loan  GivenNon-Current Asset

    I am sure that after having a look at the image included below you will have a clear understanding of this concept-

    Classification of loan in a balance sheet


    Aastha Mehta

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  1. This answer was edited.

    Yes, inventory is a current asset. Before moving to the main part of the question. I would like to familiarise you with few terms such as the meaning of inventory and current asset. I hope this answer will clear all your doubts related to this concept. Meaning of Inventory In simple terms, InventoryRead more

    Yes, inventory is a current asset. Before moving to the main part of the question. I would like to familiarise you with few terms such as the meaning of inventory and current asset. I hope this answer will clear all your doubts related to this concept.

    Meaning of Inventory

    In simple terms, Inventory (stock) is a tangible asset which refers to the stock of goods that is either available for sale in the form of finished products or raw material used in the production of goods meant for sale in some future period held by an enterprise.

    For example – A furniture dealer purchases wood, fibreglass, moulded plastic, wrought iron etc., for 1,00,000 from Amazon for manufacturing wooden chairs, sofa sets, dining tables, beds etc., then wood, fibreglass, moulded plastic, wrought iron would be considered as inventory.

    Meaning of Current Asset

    Current asset refers to all the assets of an organization which are expected to be used, consumed or easily sold through business operations within one accounting period (within a year). In simple terms, currents assets represent all the assets which can be encashed with one accounting period. Current assets are also known as short-term assets.

    For example – ABC and Co. purchases office tools and furniture from E bay on credit for 30 days then it will be considered as a bill receivable in the books of E bay. Hence bills receivable is treated as a current asset.

    Moving to the main part of the question

    Inventory as a current asset

    Inventory is treated as a current asset because the organization intends to sell them within one accounting period or 12 months from the date it is recorded in the balance sheet. All the current assets including inventory have high liquidity and convertibility.

    Inventory is a primary source of revenue, especially for wholesale and retail businesses. More than 50% of the working capital revenue is generated from inventory within a year. Therefore, it is recorded under the head – Current Asset.

    In terms of liquidity and convertibility inventory is placed somewhere in the middle of the scale of current assets. It is highly liquid as compared to the non-current asset (say land & building, plant & machinery).

    Placement in the Balance Sheet

    Inventory - Current Asset

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