A prepaid item by the seller is recorded as which entry?

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Study for the Washington Real Estate Fundamentals Rockwell Exam. Utilize flashcards, multiple choice questions with hints and explanations. Prepare thoroughly for your real estate career!

Multiple Choice

A prepaid item by the seller is recorded as which entry?

Explanation:
When a seller has prepaid an expense that benefits the buyer, that prepaid item becomes the buyer’s asset. In double-entry accounting, assets rise with a debit and fall with a credit. So the buyer records a debit to the appropriate prepaid asset account (increasing the buyer’s assets), while the seller records a credit to the same prepaid asset (decreasing the seller’s corresponding asset). This pairs the transfer of the prepaid benefit from seller to buyer and keeps the books balanced. For example, if $1,000 of prepaid insurance is transferred, the buyer debits Prepaid Insurance for $1,000 and the seller credits Prepaid Insurance for $1,000.

When a seller has prepaid an expense that benefits the buyer, that prepaid item becomes the buyer’s asset. In double-entry accounting, assets rise with a debit and fall with a credit. So the buyer records a debit to the appropriate prepaid asset account (increasing the buyer’s assets), while the seller records a credit to the same prepaid asset (decreasing the seller’s corresponding asset). This pairs the transfer of the prepaid benefit from seller to buyer and keeps the books balanced. For example, if $1,000 of prepaid insurance is transferred, the buyer debits Prepaid Insurance for $1,000 and the seller credits Prepaid Insurance for $1,000.

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