Question

Type your Response.

A company rents office space for $10,000. The company hasn’t yet recorded payment as an expense in the financial statements because it hasn’t started using the premises.

Answer 1

Answer: One needs to pay rent in advance. For instance, when you rent a certain premises for a month, you need to make the payment at the very beginning of that month. In this company’s case, the company needs to treat the rent of $10,000 as an expense on the part of the owner of the business. However, even though the business owner makes the rent payment in advance, the company won’t record the amount of $10,000 as an expense in its financial statements because it isn’t yet using the office for business purposes. This is a perfect example of the accrual concept of accounting, which says that a business needs to record expenses in the accounts only when the business incurs them, not when it makes payment. Thus, in this case, even though the company paid the expense of $10,000, it won’t record this in the financial records until it puts the office premises to use and has rightfully “incurred” the expense.

Answer 2

Response is given below;

Step-by-step explanation:

The company needs to record expense from the date tenancy agreement is entered irrespective of whether the company is using premises or not.

If the rent is paid in advance,the journal entry will be

Prepaid rent Dr.$10,000

Cash Cr.$10,000

This prepaid rent will be adjusted by the time the premises is used.Suppose at beginig of the month,the rent was paid in advance for which above entry was recorded.Now at end of the month,the journal entry will be;

Rent Expense Dr.$10,000

Prepaid Rent Cr.$10,000