What is the journal entry to record a prepaid expense?
First, you need to understand how prepaid expenses work. In the example below, the company made a $90 prepayment to the landlord for rent. When the $90 prepayment is made, that would be a debit to prepaid expense and a credit to cash.
Then at the end of each month, the company must recognize rent expense, which would be 1/3rd of the total prepayment since the prepayment was for 3 months. Therefore, the company would debit rent expense and credit prepaid rent over the next 3 months. At the end of month 3, the company would have a prepaid balance of $0 and rent expense for the last 3 months totals $90 combined.
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How do changes in prepaid expenses impact cash flow?
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