Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

2. Transaction Analysis

Journal Entries: Business Formation Example

Financial Accounting

2. Transaction Analysis

Journal Entries: Business Formation Example

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Multiple Choice

When the lessee (tenant) signs a lease for office space and pays the first month's rent in advance, which of the following journal entries should the lessee record?

Debit Prepaid Rent; Credit Cash

Debit Cash; Credit Rent Revenue

Debit Rent Expense; Credit Accounts Payable

Debit Lease Liability; Credit Rent Expense

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Verified step by step guidance

Understand the nature of the transaction: The lessee (tenant) is paying the first month's rent in advance, which means the payment is for a future benefit (use of office space). This qualifies as a prepaid expense, which is an asset.

Identify the accounts involved: The lessee is using cash to pay for the rent in advance, so the accounts affected are 'Prepaid Rent' (an asset account) and 'Cash' (an asset account).

Determine the journal entry: Since the payment is made in advance, the lessee should debit 'Prepaid Rent' to increase the asset account and credit 'Cash' to decrease the asset account.

Rule out incorrect options: Review the other options provided. 'Debit Cash; Credit Rent Revenue' is incorrect because the lessee is not earning revenue. 'Debit Rent Expense; Credit Accounts Payable' is incorrect because the rent is paid in advance, not incurred as an expense yet. 'Debit Lease Liability; Credit Rent Expense' is incorrect because there is no liability or expense involved in this transaction.

Record the correct journal entry: The correct journal entry is 'Debit Prepaid Rent; Credit Cash,' reflecting the advance payment for rent as an asset and the reduction in cash.