Answer to Question #177885 in Accounting for Milan

Question

Debit Prepaid Rent

Credit Cash

• What is the purpose of this journal entry? Like what is a good title for this journal entry. Thank you.

Debit Rent Expense

Credit Prepaid Rent

• This journal entry is the same exact thing as Debit Insurance Expense and Credit Prepaid Insurance. Right?

Rent Expense increase because its an expense and Prepaid Rent is an asset and that decreases. So, you purchase rent expense and prepaid rent is acting like cash because you are paying for it. Is this statement correct?

Answer 1

Solution:

1.). The purpose of this journal entry is to record the rent paid in cash prior to the rental period to which it relates. The amount of rent paid that has not been utilized is recorded on the balance sheet as a current asset.

Prepaid rent is debited to increase the current assets and cash is credited to reduce the amount of cash that is a current asset. This journal entry for prepaid rent will have no effect on a company’s financial statements. This is because both are current asset accounts and do not increase or decrease a company’s balance sheet as they will set off.

A good title for this journal entry is a prepaid expense journal entry.

 

2.). This is a prepaid expense adjusting journal entry. It is used to record prepaid expenses that actually become expenses. As the prepaid expense is utilized, the prepaid expense account is decreased by being credited and actual expenses increased by being debited.

This journal entry is the same as Debit insurance expense and Credit prepaid insurance. This is because it records actual insurance expenses being realized from the prepaid insurance expenses paid in advance.

 

This statement is correct. When expenses increase, they are usually debited and when assets decrease, they are normally credited. The actual rent expense is an expense that has been utilized and thus increased hence being debited, while prepaid rent is a current asset that has decreased as a result of being utilized and hence credited. The prepaid rent, which was earlier paid in cash, is now being utilized as cash to cover the actual rent expenses that have been incurred.