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Rent Paid in Advance
A rent paid in advance is nothing but the prepaid rent. When an entity rents a factory it is liable to pay a pre-decided sum of money for using the premise or property of another person.
Thus, when this pre-decided amount is paid for such a factory even before availing the benefits. It can be said that the rent is paid in advance.
Journal Entry for Advance Rent Paid
Accounting treatment of advance paid for rent by using the “Modern Rules of Accounting” –
At the time of making an actual payment –
Why do we debit prepaid rent?
Rental payment is basically an expense for an organization or any person for that matter hence we debit the increase in expenses. When such rent is paid in advance it can be called as an asset since it will generate some economic value to an organization or an entity in future.
Since prepaid rent is an asset as per the modern rules of accounting we debit the increase in an asset.
Why do we credit cash a/c?
Cash is an asset, to be precise it’s a current asset. And when an entity makes an advance payment of rent the cash in hand balance with an entity reduces.
Hence, as per the “Modern Rules of Accounting,” we credit the decrease in an asset hence cash being an asset is credited as such payment reduces the organization’s cash balance.
At the time when the prepaid rent actually applies-
Mr Max pays rent of 10,000 every month. Thus, the landlord and Mr Max entered into an agreement that Mr Max will pay rent at the beginning of each quarter for the entire quarter. So, Mr Max pays at the beginning of every quarter the amount of 30,000.
The journal entries for the above shall be:
|Advance Rent Paid|
|Prepaid Rent A/c||Debit||30,000|
|To Cash A/c||Credit||30,000|
|(Being rent paid in advance)|
And at the end of every month, the journal entry to be passed shall be –
|Rent Expense When Actually Incurred|
|Rental Expenses A/c||Debit||10,000|
|To Prepaid Rent A/c||Credit||10,000|
|(Being rental expense incurred at every month end)|
I have tried to explain the journal entry for prepaid rent as simply as I can. I hope it helped.