When the company pays RM6,000 for 6 months in advance:
Date: [Payment Date]
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Prepaid Rent (Asset) | 6,000 | |
| Cash/Bank | 6,000 |
Explanation
- Prepaid Rent increases (debit) because the company has a future economic benefit (use of rented space).
- Cash/Bank decreases (credit).
Adjusting Entry (Monthly or at period end)
Each month, one-sixth of the amount becomes an expense:
RM6,000 ÷ 6 months = RM1,000 per month
End of each month:
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Rent Expense | 1,000 | |
| Prepaid Rent | 1,000 |
Example Scenario
On 1 October 2024, a company pays RM6,000 for six months of rent in advance, covering the period from October 2024 to March 2025.
The company’s financial year-end is 31 December 2024.
The payment must be separated into:
- The portion relating to the current financial year (2024), and
- The portion relating to the next financial year (2025).
Initial Journal Entry
At the time of payment, the entire amount represents a future economic benefit; therefore, it is recorded as a prepaid expense.
Journal Entry (1 October 2024):
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Prepaid Rent | 6,000 | — |
| Cash/Bank | — | 6,000 |
This entry records the payment and recognizes an asset representing unused rent.
Allocation of Expense at Year-End
The rent covers a six-month period:
- October, November, December 2024
- January, February, March 2025
Total months: 6
Monthly rent: RM6,000 ÷ 6 = RM1,000 per month
Months applicable to 2024:
- October
- November
- December
Total = 3 months × RM1,000 = RM3,000
Thus:
- RM3,000 should be recognized as an expense in 2024
- RM3,000 remains as a prepaid asset for 2025
Year-End Adjusting Entry
To recognize the portion of rent that relates to the current year, an adjusting entry is made on 31 December 2024.
Journal Entry (31 December 2024):
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Rent Expense | 3,000 | — |
| Prepaid Rent | — | 3,000 |
This entry transfers the expired portion of prepaid rent to the income statement.
Treatment in the Following Year
The remaining RM3,000 continues to be recognized as an asset (prepaid rent) on the balance sheet as at 31 December 2024. During 2025, the company will consume the remaining three months of rent.
A monthly adjusting entry is made to expense RM1,000 each month:
Monthly Entry (e.g., January 2025):
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Rent Expense | 1,000 | — |
| Prepaid Rent | — | 1,000 |
This entry is repeated for February and March 2025.
Full Example: Year-End Adjustment for Rent Paid in Advance (RM6,000 for 6 Months)
Scenario
A company pays RM6,000 on 1 October 2024 for six months of rent in advance (covering October 2024 to March 2025).
The company’s financial year-end is 31 December 2024.
We must separate:
- Rent expense for this financial year (2024)
- Rent prepaid for next financial year (2025)
Step 1: Initial Journal Entry (1 Oct 2024)
Debit: Prepaid Rent RM6,000
Credit: Cash/Bank RM6,000
Step 2: Determine How Much Rent Belongs to 2024
Rent period: 6 months
Monthly rent: RM6,000 ÷ 6 = RM1,000 per month
Months in 2024 that should be expensed:
Oct, Nov, Dec = 3 months
So:
- Rent expense for 2024 = 3 × RM1,000 = RM3,000
- Rent prepaid for 2025 = 3 × RM1,000 = RM3,000
Step 3: Year-End Adjusting Entry (31 Dec 2024)
To transfer 3 months of rent from prepaid rent to expense:
Debit: Rent Expense RM3,000
Credit: Prepaid Rent RM3,000
Now the accounts show:
- Rent Expense (P&L): RM3,000
- Prepaid Rent (Balance Sheet): RM3,000
Step 4: January–March 2025 Adjustments
Each month in 2025, expense RM1,000 per month:
Example for January 2025:
Debit: Rent Expense RM1,000
Credit: Prepaid Rent RM1,000
(Same entry for Feb and Mar.)
Final Summary Table
| Period | Month(s) | Amount | Accounting Treatment |
|---|---|---|---|
| Oct–Dec 2024 | 3 months | RM3,000 | Rent Expense (2024) |
| Jan–Mar 2025 | 3 months | RM3,000 | Prepaid Rent (carried forward) |