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1.4 Example 3: prepayments 

A business opens on 1 January 20X4 in a shop which is on a 20 year lease. The rent is $20,000 per 

year and is payable quarterly in advance. Payments were made on what are known as the 'quarter-days' 

(except the first payment) as follows. 

 

$  

1 January 20X4 

5,000.00 

25 March 20X4 

5,000.00 

24 June 20X4 

5,000.00 

29 September 20X4 

5,000.00 

25 December 20X4 

5,000.00 

What will the rental charge be for the year ended 31 December 20X4? 

Solution

 

The total amount paid in the year is $25,000. The yearly rental, however, is only $20,000. The last 

payment was almost entirely a prepayment (give or take a few days), as it is payment in advance for the 

first three months of 20X5. The charge for 20X4 is therefore: 

 

 

$  

Paid in year 

 

25,000.00 

Prepayment 

 

 (5,000.00) 

 

 

20,000.00 

The double entry for this prepayment is: 

DEBIT Prepayments 

(asset) 

$5,000.00   

CREDIT Rent 

account 

 

 

$5,000.00 

1.5 Double entry for accruals and prepayments 

You can see from the double entry shown for both these examples that the other side of the entry is 

taken to an asset or a liability account.  

 Prepayments 

are included in current assets in the statement of financial position. They are