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I am running a small business that prepays office rent on the 25th of each month (for the next month). I am using accrual based accounting with QuickBooks.

My question is, do I need to debit current assets/credit cash on the 25th of each month and then debit expenses / credit current assets at the end of the next month FOR ALL 12 MONTHS? Or do I only need to do this in December when I balance the books for taxes?

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  • I think you mixed the credit and debit there... What country are you in?
    – littleadv
    Feb 27, 2014 at 2:37
  • Sorry for the late upvote...
    – user11865
    Feb 27, 2014 at 18:43

1 Answer 1

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Your account entries are generally correct, but do note that the last transaction is a mixture of the balance sheet and income statement. If Quickbooks doesn't do this automatically then the expense must be manually removed from the balance sheet.

The expense should be recognized on the balance sheet and income statement when it accrues, and it accrues when the prepaid rent is extinguished when consumed by the landlord, so that is when the second entry in your question should be booked.

The cash flow statement will reflect all of these cash transactions immediately.

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  • For tax purposes you can recognize prepaid expense in some cases, depending on the tax law. In the US, I believe, if you prepay up to a year, you can recognize it when paid. That's why I asked about the country.
    – littleadv
    Feb 27, 2014 at 3:27
  • @littleadv I leave tax to you and JoeTaxpayer. I was only describing the financial accounting. Rational financial accounting is universal, I find. If the OP is looking for tax accounting, I'll delete.
    – user11865
    Feb 27, 2014 at 4:03
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    No, why, your answer is fine, I was just adding to it
    – littleadv
    Feb 27, 2014 at 4:35
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    @Justin just out of curiosity, any particular reason you chose accrual based accounting for your business? As an engineer, you're likely providing services, not selling inventory... Why did you do that to yourself?
    – littleadv
    Feb 27, 2014 at 22:46
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    My business will have inventory and products sold, so it is not just services. Accrual is GAAP and I want my business to be friendly to investors, so setting this standard is good practice. Thanks all for your input. Feb 28, 2014 at 7:26

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