ACCA Applied Knowledge · Financial Accounting · Double-entry bookkeeping principles including the maintenance of accounting records
A business pays $2,500 cash for rent covering the next year, all of which relates to future periods. How should the payment be recorded?
Debit prepayments and credit cash for $2,500. Because the rent relates entirely to future periods, it is an asset at the reporting date rather than an expense, and it is released to profit or loss as the periods expire.
- ADebit prepayments (asset) $2,500; credit cash $2,500Correct
- BDebit rent expense $2,500; credit cash $2,500
- CDebit cash $2,500; credit prepayments $2,500
- DDebit accruals $2,500; credit cash $2,500
Explanation
Rent paid for future periods is a prepayment, an asset, so it is debited, and cash is credited. Expensing it immediately would overstate current expenses. Option D would reduce a liability that does not exist.
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