Annual rent of ₦30,000 is payable on or before the last day of every month. The accounting period of the business enterprise is from 1 July to 30 June. Details of the amount, the date the rent expenses were due, and dates the rent expense were paid, and the amounts that were paid through the bank are provided as follows:
Required: Show the double entry for rent expense paid in the relevant ledgers.
A suggested solution to practice activity 6.8
The rent expense account in the ledger is as follows.
Debit Rent expense account
Credit Cash book (that is, the bank column in the cash book)
The payment for rent expense on 30 April 2016 is for three months: April, May, and June. The last two payments of ₦7,500 occurring on 31 May and 30 June respectively are not for the accounting period of 2016. These payments for rent expense can be divided into ₦2,500 for 31 July, ₦2,500 for 31 August, ₦2,500 for 30 September, ₦2,500 for 31 October, ₦2,500 for 30 November, and ₦2,500 for 31 December.
Based on the IASB (2018, Conceptual Framework), accrual accounting shows the effects of rent expense on a reporting entity’s economic resources and claims in the periods that those effects occur, even if the resulting cash payments occur in another period.
On this basis, the effects of the rent expense on the reporting entity’s assets and claims from 1 July 2015 to 30 June 2016 are shown, even if the resulting cash payments occur in a different period (that is, 1 July 2016 to 30 June 2017). Payments for rent expense on 30 April 2016 cover the amounts for April, May, and June 2016. The rent for April, May, and June is ₦2,500, respectively. Hence, the rent expense has been prepaid by ₦15,000.
The last two payments of ₦7,500 occurring on 31 May and 30 June respectively are not for the accounting period of 2016. These payments for rent expense can be divided into ₦2,500 for 31 July, ₦2,500 for 31 August, ₦2,500 for 30 September, ₦2,500 for 31 October, ₦2,500 for 30 November, and ₦2,500 for 31 December. Hence, rent expense has been prepaid for six months.
The profit or loss should depict the effects of rent expense in the period that the effect of rent expense occurs (that is, the year ended 30 June 2016).
For an accounting period of 12 months, the amount for rent expense is ₦30,000. The amount should be transferred to the statement of profit or loss.
The rent expense of ₦30,000 is posted to the profit or loss for the year ended 30 June 2016. But the rent expense account will have a debit balance of ₦15,000. This is a benefit paid for but not used up at the period end. It is an asset and should be brought down into the next accounting period in the rent expense account as a debit balance. The debit balance is known as a payment in advance or prepaid expenses.
An attempt to balance the rent expense account shows that ₦15,000 has been paid in advance compared to the actual rent expense of ₦30,000. The prepaid rent of ₦15,000 should be termed ‘prepaid c/d’.
The prepaid c/d represents a prepaid expense. Prepaid expense b/d is on the increase side of the rent expense account. This implies that rent expense of ₦15,000 has been paid in advance to the next accounting period starting from 1 July 2016 to 30 June 2017.
Prepaid expense is an asset. Since the rent expense for April, May, and June 2016 were paid in advance by the sum of ₦15,000. The sum is an amount that can be readily converted to cash within the next one year (current asset). Remember the elements of financial statements.
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