Prepaid rent is recorded on the balance sheet as an asset, although it is important to understand that all rents are expenses, whether they are prepaid or not. Prepaid rent in trial balance is allocated in the asset column because it is recognized as a future expense, which is not expired yet. As soon as it expires, the given expense is recorded as a liability.
Explanation:
It is critical to note that prepaid rent is one of the many forms of prepaid expenses. Prepaid expenses are the last item of current assets reflected in the balance sheet of companies. Often, they are translated as deferred expenses, but this is not entirely true. In essence, being such, they, according to the definition of current assets, must be consumed within one year from the date of the balance sheet.
If they are consumed over a longer period, such assets are treated as deferred expenses, denoted by the term deferred charges, which appear in the balance sheet usually after intangible assets. Thus, deferred expenses are divided into two parts: prepaid expenses and deferred expenses.
Prepaid assets are an asset that represents the spent funds, the benefits of which will be received, that is, they will be consumed within one year from the date the balance sheet is drawn up. These include prepaid services, insurance policies, and advertising. However, in practice, companies often reflect expenses incurred in advance for several years under this item.
Prepaid expenses are written off to expenses of the corresponding periods, which was discussed in the section on corrective entries. Prepaid expenses are recognized in the statements at cost in that part that remained unused at the balance sheet date.