Accounting adjustments

• A prepaid expense is when the amount paid during the year is more than the full expense for the period

  a prepaid expense is a current asset
• prepayments:

  when we pay for an expense which relates to the following period

  • we pay for an expense in advance

  the payment has already been recoded, so at the end of the period we reduce this period’s expense and defer the expense to the next period.

  the deferred amount is included in the sofp : current assets

  • it is called a prepaymeant / prepaid expense
• what is the journal entry : ABC corporation has a fiscal year from 1st January to 31st December. On 1st December, ABC pays £4000 for 4 months‘ rent. what will be the entries on 1st December and 31st December?

  1st December :

  Dr rent expense : 4000

  Cr cash: 4000

  31st December :

  Cr rent expense : 3000

  Dr prepaid rent expense: 3000
• Mr Joseph Bent


  Rents office premises on a quarterly basis and makes his payments in advance
• Rental agreement commenced


  1/3/20X0
• Rental payment


  £6000 per quarter
• Latest payment made, covering the period to 28th February 2021


  1/12/2020
• Mr Joseph's year end is 31st December
• Accounting entries on 1st December

  1. Dr rent expense: 6000

  2. Cr cash: 6000
• Accounting entries on 31st December

  1. Dr prepaid rent expense: 4000

  2. Cr rent expense: 4000
• Total paid for a year = 6000 x 4 = 24000
• The 24,000 is reflected in the cash flow
• In the income statement you deduct the prepaid amount: 24,000 - 4,000 (total amount - prepayment)
• In the SOFP, the extra paid is a prepayment at the year end's SOFP
• The prepayment amount at year end is 4000