When the company pays rent expense for the current month, what is the effect on the accounting equation for that company?
Business · High School · Mon Jan 18 2021
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When a company pays rent expense for the current month, it affects the accounting equation in the following way:
- Assets decrease: Cash, which is an asset, decreases because the company is using cash to pay for the rent expense.
- Equity decreases (potentially): If the company is paying the rent expense out of its revenues or earnings (which affect retained earnings), then equity decreases. However, if the rent expense is paid out of pre-paid expenses (which is an asset), equity remains unchanged until the prepaid expense is adjusted at the end of the accounting period.
The specific impact depends on whether the rent payment is expensed immediately as rent expense or if it's initially recorded as a prepaid expense (an asset) to be recognized as an expense over the duration of the lease.