Answer: One needs to pay rent in advance. For instance, when you rent a certain premises for a month, you need to make the payment at the very beginning of that month. In this company’s case, the company needs to treat the rent of $10,000 as an expense on the part of the owner of the business. However, even though the business owner makes the rent payment in advance, the company won’t record the amount of $10,000 as an expense in its financial statements because it isn’t yet using the office for business purposes. This is a perfect example of the accrual concept of accounting, which says that a business needs to record expenses in the accounts only when the business incurs them, not when it makes payment. Thus, in this case, even though the company paid the expense of $10,000, it won’t record this in the financial records until it puts the office premises to use and has rightfully “incurred” the expense.
