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I understand the concept of prepaid expenditure. My question is the display of year end t account:
since i can not make a t, i will try to explain what i dont understand.
Assumer cash paid in the year for rent is 6400. Also, the annual charge for the rent is 5000. that leaves 1400 as prepayment.
Year end:
1. the rent account will show 6400 on the dr side.
2. we will pass Dr. Profit/loss, Cr Rent 5000this leaves 1400 balance.
now we pass the prepaid entry at year end:
Dr Prepayment 1400
Cr Rent 1400this zero’s out the expense t.
however, in my text, it shows 1400 as b/f on the Dr side of the rent expense, with the narration “prepayment b/f 1400”.
My question is, if we are doing year end entries, why shd 1400 be left behind?
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related question:
on jan 1, the new year, we would reverse the prepaid entry, which wd show an opening Dr balance in rent of 1400.
is this correct?
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thanks
There are two ways of showing it, both giving the same end result.
What you have typed is the better way and ends up with a debit balance on the prepayment account. This will be shown in the Statement of financial position. At the start of next year, the entry will be reversed and it will be moved to the rent expense account.
The way your text book has shown it, they still end up with a debit balance – it is just that it is on the rent expense account instead of the prepayments account. However, in the same way it will be shown on the Statement of financial position.
It does not matter which way (there are no ‘laws’ about double entry so long as the final balances agree).
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