How does prepaid rent affect accounting equation?
Prepaid rent affects the accounting equation by increasing the asset account Prepaid Rent and decreasing the cash account. This is because when rent is prepaid, cash is paid out of the business and the amount is recorded as an asset until the rent is used. The accounting equation would be affected as follows:
Assets = Liabilities + Equity
Assets + Prepaid Rent (increase) = Liabilities + Equity (no change)
Cash (decrease) = Liabilities + Equity (no change)