Renting assets is part of everyday business and as it happens, with operating leases there are often enough prepayments required. Question than to the one renting the asset and making the payment should be how this prepayment should be recognized on the accounts. 

In my practice I’ve seen too often that those payments are just fully expensed to this year’s results and that’s it. There’s usually no question whether this makes any sense or if it’s even the correct approach. Matter of fact is however that it’s wrong. In essence of course, if the amount is insignificant, by all means, however the only correct approach is to distribute the expense over the rental period.

For an example you were requested to pay 1,000 as a prepayment for an asset you will be renting for 5 years. Your annual expense from the prepayment is therefore 200. Yes, you’re making the payment when initially renting asset, however the other part of the entry will be “prepaid expenses” or something similar on the balance sheet and not your expense account. Thus once a month you’ll be expensing just 1/12 of the 200 and this for the 5 year period every month. This “expensing” means you’re taking the 1/12 of 200 away from the prepaid expenses account and charging it onto a respective expense account on the income statement.

In a way those prepayments act just as normal prepaid expenses you’d make for subscriptions and whatnot. Just never forget to actually treat them the same way.