Prepaid Rent and Other Rent Accounting for ASC 842 Explained

Similarly to ASC 840, this straight-line lease expense is calculated as the sum of all of the rent payments over the lease term and divided by the total number of periods. A full example with journal entries of accounting for an operating lease under the new accounting standards can be found here. Keep in mind however, rent or lease expenses are related to operating leases only. Prepaid assets are the opposite of accrued expenses for these pertains to the expenses already paid but these will only be incurred in the future. An accounting transaction is a business activity or event that causes a measurable change in the accounting equation.Accountingverse is your prime source of expertly curated information for all things accounting.

Example Prepaid Rent Adjustment Entry (for February):

The premium covers twelve months from 1 September 2019 to 31 August 2020, i.e., four months of 2019 and eight months of 2020. It would be incorrect to charge the whole $4,800 to 2019’s prepaid rent accounting profit and loss account. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

• On the other hand, the Right-of-use (ROU) asset amortization is the difference between the payment and the interest component, which is $33,469 ($36,721 payment – $3,251 “Interest”).
• For many organizations rent is a significant expense incurred to support their business.
• If so, the financial statements under-report the expense and over-report the asset.
• On the other hand, variable lease payments are those made for the right to use an asset.
• It is presented in the contract, along with planned increases, and will not change over the contract term without an amendment.
• The company ABC makes this journal entry to also reduce the balance of prepaid rent by $2,500 ($5,000 / 2) because the benefit of the expenditure has already been used up by one month in January.

Prepaid Rent Under ASC 842 – a Step-By-Step Guide & Example

• A renter frequently sets up a schedule of rent payments in its accounts payable software module, so that the same payment is made on the same day of each month until a predetermined termination date is reached.
• CFI is on a mission to enable anyone to be a great financial analyst and have a great career path.
• Under ASC 842, you would see the same entries, but the prepaid rent would be recorded to the ROU asset in place of a separate prepaid rent account.
• A concern when recording prepaid rent in this manner is that one might forget to shift the asset into an expense account in the month when rent is consumed.
• It also aids in the comparison of financial performance across periods, as it eliminates the distortions that could arise from irregular rent payments.
• This is done through an amortization entry that reduces the prepaid rent account and records the rent expense for that month.

If so, the financial statements under-report the expense and over-report the asset. To avoid this, keep track of the contents of the prepaid assets account, and review the list prior to closing the books at the end of each month. When rent is paid just a few days early, it may not need to be recorded as prepaid rent.

Accounting Process for Prepaid or Unexpired Expenses

As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. Free rent during a lease is called an abatement and is accounted for as no lease payment under ASC 842. They pay the lessor three months in advance on the first day of every quarter.

Prepaid Rent Accounting Entry

When a rent agreement offers a period of free rent, payments are not due to the lessor or landlord. However, you are recording the straight-line rent expense calculated by dividing the total amount of required rent payments by the number of periods in the lease term. The initial journal entry for prepaid rent includes a debit to the prepaid rent asset account and a credit to cash or bank. Subsequent adjusting entries involve a debit to the rent expense account and a credit to the prepaid rent asset account. Instead, prepaid expenses are initially recorded on the balance sheet, and then, as the benefit of the prepaid expense is realized, or as the expense is incurred, it is recognized on the income statement. A concern when recording prepaid rent in this manner is that one might forget to shift the asset into an expense account in the month when rent is consumed.

Accrued rent is the amount of unpaid rent owed by a renter or not yet collected by the landlord. The accounting for accrued rent from the perspectives of the landlord and the renter are noted below. We record this as an increase to the asset account Accounts Receivable and an increase to service revenue.

Accrued Rent Accounting under ASC 842 Explained

The reporting of prepaid rent in financial statements is a reflection of a company’s strategic financial planning and its commitment to transparency. In the balance sheet, prepaid rent is presented under current assets, indicating that the company expects to utilize the rental benefits within the next year. This placement among assets is crucial as it informs investors and creditors about the company’s short-term financial commitments and its allocation of resources.