 Prepaid rent is an example of a deferral adjusting entry. It occurs when cash is paid before rent expense is incurred. Let's look at an example. Assume on January 1, more AC prepays $6,000 for a three-months rent on a recording studio. Let's answer some of these questions. What's the journal entry on January 1? Is this an adjusting entry? And what is the balance on the unadjusted trial balance for our prepaid rent account and our rent expense account? The journal entry on January 1 is a debit to the asset account prepaid rent and a credit to the asset account cash for $6,000. This is not an adjusting entry because there is an underlying transaction that happened on January 1. So the unadjusted balance for prepaid rent at the end of the month is still $6,000. And as of yet, no rent expense has been recorded. Okay, so forget accounting for a second. We know that those balances aren't correct. More AC has paid $6,000 for three months, so that would be $2,000 a month. So we should expect to see $2,000 of rent expense for January, February and March. This is why we need to adjust these accounts. The adjusting entry on January 31 is a debit to the expense account rent expense and a credit to the asset account prepaid rent for $2,000. At the end of the month, more AC used up $2,000 of the prepaid asset. When we use up assets, we create expense. So now the account balances are correct. The asset prepaid rent has an adjusted balance of $4,000 and the expense account rent expense has a balance of $2,000 for January. Then the adjusting entry on February 28 isn't any different. It's a debit to the expense account rent expense and a credit to the asset account prepaid rent for $2,000. When we look at the balances, prepaid rent has an adjusted balance of $2,000 and the expense account rent expense has a balance of $2,000 for February. Finally, we make the adjustment for March. Again, we debit the expense account rent expense and credit the asset account prepaid rent for $2,000. Notice now that the prepaid rent account has a zero balance as Morrissey has no more asset remaining at the end of March. Rent expense for March has also been increased $2,000.