What is prepaid rent?

27 января 2020 by Forex Broker online-accounting.net

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The prepaid rent differs from the usual one in that all payments are made one period earlier (at the beginning of each period). The accrued annuity value is equivalent to the set of all payments at the end of the last annuity period, and the current value is at the time of the first payment, i.e., at the beginning of the first period.

Prepaid rent accounting

All types of rents, including prepaid rent, follow a principle of the regularity of payments. The following set of parameters characterizes prepaid rent:

  • amount – the amount  of a single payment;
  • annuity period – the time interval between two consecutive payments;
  • term of prepaid rent – the time from the beginning of rent till the moment of the last payment. 

All the factors mentioned above are used in prepaid rent accounting. The interest rate also plays a role. Usually, when concluding an annuity contract, annual interest rates are indicated. The interest rate for the period is equal to the portion of the annual interest rate divided by the number of periods in the year. Now, you know, “What is prepaid rent?” and how to calculate it.

Prepaid assets

Some accountants ask: “Is prepaid rent debit or credit?”. Prepaid assets are expenses that a business made in advance. At the same time, their accounting is provided for in the next balance sheet period, but not in the current one.

One typical example of this type of asset is dividends or annuities, the payment of which was made in advance. In a slightly different formulation, prepaid assets are finances allocated for the implementation of specific tasks. Through their use, various goals of financial importance are achieved.

Prepaid assets have a certain value. Almost always, their involvement is associated with financial spendings. However, after a certain period with proper investment, the investor can count on dividends. It is important to emphasize that each of the presented sources of financing has a particular value in percentage ratio.

For proper management of existing liabilities, a preliminary evaluation procedure should be performed. Not only should individual sources of financing be subject to this process, but also the total capital used as prepaid assets.

To determine the price of prepaid assets, you should make certain calculations beforehand. In fact, the price index, in this case, is a percentage of the fee for the fact of using the attracted funds in relation to their total volume.

If we talk about the optimal price of such funds, it is determined if the assets of the short-term type will be financed from short sources, and long-term, respectively, at the expense of long-term sources. This ratio can give the most favorable result.

One of the critical tasks to be solved when evaluating investment projects is to determine the actual price of prepaid assets. Several factors affect the cost of such capital. One of these indicators is the cost of funding sources, which can be own or borrowed — provided that the cost of ownership or borrowed funds have undergone specific price changes, the entire structure of financing changes. This course of events is due to the implemented effect of financial leverage.

The existing concept of prepaid assets pricing policy includes the calculation of interest for the fact of using capital, as well as the determination of the level of profitability in the process of investing in the assets of an individual enterprise, which helps to maintain its market value.

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