On November 1, a company rented office space and paid \$2,400 for three months' rent in advance. Which of the following is the correct journal entry to record this transaction?

• A. Debit Rent Expense \$800; Credit Cash \$800
• B. Debit Prepaid Rent \$2,400; Credit Cash \$2,400
• C. Debit Cash \$2,400; Credit Rent Revenue \$2,400
• D. Debit Rent Expense \$2,400; Credit Cash \$2,400

Answer: (B)

Verified step by step guidance

1. Understand the nature of the transaction: The company is paying rent in advance for three months. This means the payment is a prepaid expense, which is an asset, not an immediate expense.
2. Identify the accounts involved: The two accounts affected are 'Prepaid Rent' (an asset account) and 'Cash' (another asset account). Prepaid Rent increases because the company now has a right to use the office space in the future, and Cash decreases because the payment is made.
3. Determine the type of entry: Since Prepaid Rent is an asset account, it is increased with a debit. Cash, also an asset account, is decreased with a credit.
4. Write the journal entry: Debit Prepaid Rent for \$2,400 to reflect the increase in the prepaid asset. Credit Cash for \$2,400 to reflect the decrease in cash.
5. Review the journal entry: Ensure that the total debits equal the total credits, which maintains the accounting equation (Assets = Liabilities + Equity). The correct journal entry is: Debit Prepaid Rent \$2,400; Credit Cash \$2,400.