The cash flow shows how much money flowed into, or out of each account listed. Most accounts (like rents and repairs) only have money flowing one way. Money generally flows into rent, very rarely out. Because of this, the cash flow will consistently show a positive number on the rent line each month so long as money is received. The prepaid line item can be thought of as a holding account, where money flows in when paid, and then out when applied to a charge (Like rent).
For instance, if the property started management in August. The property rents for $1000.00 a month and is occupied by a tenant, Bob. If Bob pays his $1000 rent on the first of every month, then there would never be any money in the prepaid account and we would see a rent line like so:
Then, Bob pays October rent early, on September 30th. This is considered a prepaid and now September prepaids will show $1000 and the October prepaids will show a negative $1000. This is because money flowed into the Prepaids account on September 30th, and then flowed out to be applied to rent on October 1st. You’ll notice that the total operating income for September is $2000 and is $0 for October.
When Bob then pays his November rent on November 1st, the cash flow will return to normal.
In the image above, it can be seen that the money for October came in early, so there was no income in October, the Total Operating Income was 0.00.
However, if Bob prepaid November rent on October 30th then the October prepaid account will have $1000 going out at the beginning of the month (when October prepaid was applied to rent), and then have another $1000 coming in at the end of the month.
In October, there is $1000 of income recorded, because $1000 was received in that month, at the end of the month. If this trend continues with Bob prepaying December on November 30th, $1000 is reported for November as well.
If a cash flow is produced In the middle of November, it would look like the owner had $0 income, but by the end, the owner had $1000 due to the tenant’s prepay for November.
Finally, Bob continues the trend, and prepays his January 1, 2023 rent on December 30th, 2022.
In this situation, the prepaid rent can be thought of as moving forward each month. In the middle of every month, the prepaid will be negative, because the money in the prepaid account moved out and into the rent account. Then, because the rent was paid at the end of the month, the prepaid account is refilled.
The cash flow shows the CHANGE in the account. Over the course of the month, there was no change, thus the cash flow shows zero. The only month that had a change was September, when the prepaid account increased from $0 to $1000.
As far as the IRS is concerned, this property collected $6000 in income for 2022. This includes a prepayment of January 2023 rent. When paying 2023 taxes, that January 2023 rent will not be counted as income, because it was already accounted for in 2022.
When the rents and prepaids stay consistent, understanding the cash flow is simple. But if there are multiple tenants prepaying some months and not others, it can get a little complicated. The total operating income will show the actual money received in each month.