journal entry

Prepare the journal entry that the lessee should record. The same adjusting entry must be recorded as of the last day of January, February, March, April, and May. As the benefits of the expenses are recognized, the related asset account is decreased and expensed. First, debit the Prepaid Expense account to show an increase in assets.

Recall from the transaction summary that Big Dog paid for a 12-month insurance policy that went into effect on January 1 . And it reports accumulated depreciation in the balance sheet as a deduction from the related asset. The adjusting journal entry should be passed at the end of every period to prepare and present the correct monthly financial statement of the company to the stakeholders. Prepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.

Prepaid Rent – Deferred Expense

Depending on the rental agreement, this prepayment can be made to cover a month, quarter, or year. The journal entry is completed this way to reverse the accrued revenue, while revenue entry remains the same, since the revenue needs to be recognized in January, the month that it was earned. If you don’t, your financial statements will reflect an abnormally high rental expense in January, followed by no rental expenses at all for the following months. Revenue must be accrued, otherwise revenue totals would be significantly understated, particularly in comparison to expenses for the period. His firm does a great deal of business consulting, with some consulting jobs taking months. If you earned revenue in the month that has not been accounted for yet, your financial statement revenue totals will be artificially low. For instance, if Laura provided services on January 31 to three clients, it’s likely that those clients will not be billed for those services until February.

prepaid rent

Any Adjusting Entry Example: Prepaid Rent you purchase a big ticket item, you should also be recording accumulated depreciation and your monthly depreciation expense. Most small business owners choose straight-line depreciation to depreciate fixed assets since it’s the easiest method to track. Common prepaid expenses include rent and professional service payments made to accountants and attorneys, as well as service contracts.

Prepaid Insurance – Deferred Expense

Since the lasts one year, divide the total cost of $1,800 by 12. When you buy the insurance, debit the Prepaid Expense account to show an increase in assets. And, credit the Cash account to show the loss of cash.

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