# Prepaid expenses

Section 3. Accrual basis accounting

Q14. Prepaid expenses
On December 1, 20×1, Entity A rented office space for one year and prepaid the $36,000 yearly rent. What are the journal entries to be prepared on December 1 and 31, 20×1? A14. Prepaid expenses are recorded on the debit side as an asset account. (1) December 1, 20×1: to record the payment of prepaid rent expense  Debit Credit Prepaid rent expense 36,000 Cash 36,000 [Note] 1. Increase in prepaid rent expense (asset): debit 2. Prepaid rent expense is an asset account, because the prepaid portion of rent represents future economic benefits. (2) December 31, 20×1: to record the rent expense for the month of December 20×1  Debit Credit Rent expense 3,000 Prepaid rent expense 3,000 [Note] 1. Increase in rent expense (expense): debit 2. Decrease in prepaid rent expense (asset): credit 3. Annual rent expense =$36,000
4. Monthly rent expense = $36,000 x 1/12 =$3,000

[Exercise]
On November 1, 20×1, Entity B paid $12,000 for insurance premium to cover 6 months ending on April 30, 20×2. Prepare journal entries on November 1 and December 31, 20×1. (1) November 1, 20×1: to record the payment of prepaid insurance expense  Debit Credit Prepaid insurance expense 12,000 Cash 12,000 [Note] 1. Increase in prepaid insurance expense (asset): debit 2. Prepaid insurance expense is an asset account, because the prepaid portion of insurance premium will provide economic benefits in the future. (2) December 31, 20×1: to record the insurance expense for the two-month period from November 1 to December 31, 20×1  Debit Credit Insurance expense 4,000 Prepaid insurance expense 4,000 [Note] 1. Increase in insurance expense (expense): debit 2. Decrease in prepaid insurance expense (asset): credit 3. Insurance expense for a 6-month period =$12,000
4. Monthly insurance expense = $12,000 x 1/6 =$2,000
5. Insurance expense for a two-month period = $2,000 x 2 =$4,000