Is Prepaid Rent an Asset?

Q:

Is prepaid rent an asset?

A:

Prepaid rent is  known as a prepaid expense. It represents rent that has been paid in advance. For example, a business may rent an office building for 12-months and pay for the full year of rent in advance upon signing the lease.

Prepaid rent is an asset that appears on a company’s balance sheet. Do not let the fact that prepaid rent is called a prepaid expense fool you. It is an asset, not an expense. Remember that the balance sheet divides assets up between current assets and non-current assets.  Generally, prepaid rent is considered a current asset because it represents rent that is paid within a year.

Let’s take a look at the accounting journal entries for prepaid rent.

Prepaid rent is recorded as a debit to prepaid rent and a credit to cash when the initial prepayment is made. As an example, assume that $12,000 is the amount of the prepaid rent. Also, assume that the prepaid rent was paid on March 1 for one year of rent. The March 1 journal entry would be as follows to record the cash payment of prepaid rent:

Account NameDebitCredit
Prepaid Rent (Prepaid Expense)$12,000
Cash$12,000

On March 31, one month of rent will be used or $1,000 of the prepaid rent ($12,000 total rent ÷ 12 months). When the rent is used up over time, an expense is recorded and the value of the prepaid rent is decreased. The adjusting entry will be as follows on March 31:

Account NameDebitCredit
Rent Expense$1,000
Prepaid Rent (Prepaid Expense)$1,000

Keep in mind that rent is not the only prepaid expense. Other items that a company may prepay are taxes, insurance, supplies, utilities, salaries, and so on. Again, these prepaid assets will be reduced with the passage of time as the expense is realized. While prepaid rent and other prepaid expenses are assets, their value will typically be reduced within a short period. You should remember this when reviewing a balance sheet and evaluating a business.