Chapter 5
The Accounting Cycle: Adjustments
115
the income statement. As Figure 5.13 shows, after the adjustment on March 31, the prepaid rent
account will be left with a balance of $4,400 representing the two months that are still prepaid.
PREPAID RENT
RENT EXPENSE
+
+
-
-
6,600
4,400
2,200
Adjustment
2,200
journal Page 1
date
2016
account title and explanation Pr debit credit
Mar 31 Rent Expense
2,200
Prepaid Rent
2,200
To adjust for 1 month rent used
______________
FIGURE 5.13
The same adjustment will be made on April 30 (to recognize April’s rent expense) and May 31
(to recognize May’s rent expense). Figure 5.14 shows the timing of the transactions related to the
prepaid rent.
March 1
March 31
April 30
Adjustment Period
(One Month)
Transactions FromTenant's Perspective
Make prepayment to
Raina for March, April
and May Rent
Date of Adjustment
Adjustment
Adjustment
Adjustment
Date of Adjustment
May 31
Date of Adjustment
CR $6,600 Cash (asset)
CR $2,200 Prepaid
Expenses (asset)
CR $2,200 Prepaid
Expenses (asset)
CR $2,200 Prepaid
Expenses (asset)
DR $6,600 Prepaid
Expenses (asset)
DR $2,200 Rent Expense
(income statement)
DR $2,200 Rent Expense
(income statement)
DR $2,200 Rent Expense
(income statement)
Recognize earned rent
expense for May
Recognize earned rent
expense for April
Recognize earned rent
expense for March
______________
FIGURE 5.14
Prepaid expenses and unearned revenue are opposites. Usually, as in this example, the prepaid
expense of one company (the tenant) is the unearned revenue of another company (Raina). The
above example illustrated prepaid rent, however the same idea and transactions would apply for an
item such as prepaid insurance or prepaid property taxes.
office supplies
Another type of prepaid expense is office supplies. Office supplies are the physical items used to run
the office of a business and include paper, photocopy toner, printer toner, pens, etc. When they are
initially purchased, these items are recorded as assets on the balance sheet. Instead of recording each
item as an expense when it is used, a single adjusting entry is made for the total office supplies used.
