Prepaid Rent Accounting
Overview of Prepaid Rent Accounting
Prepaid rent is rent paid prior to the rental period to which it relates, so the tenant should record on the balance sheet the amount of rent paid that has not yet been used.
Rent is commonly paid in advance, being due on the first day of that month covered by the rent payment. The landlord typically sends an invoice several weeks early, so the tenant issues a check payment at the end of the preceding month in order to mail it to the landlord and have it arrive by the due date. This presents a problem for the tenant, since the payment would normally appear in its income statement as rent expense in the period in which the invoice was entered in the accounting software however, since the payment was recorded and the check was cut in the month before the period to which the payment relates, it is actually prepaid rent.
The proper way to account for prepaid rent is to record the initial payment in the prepaid assets (or prepaid rent) account, using this entry: