What is the treatment of a prepaid item by the seller during a transaction?

In a real estate transaction, prepaid items refer to expenses that have been paid in advance by the seller, such as property taxes, homeowners insurance, or utility bills. When the transaction closes, these prepaid items need to be allocated appropriately between the buyer and the seller.

The treatment of prepaid items by the seller generally involves debiting the buyer and crediting the seller. This means that the buyer is charged (debited) for the amount of the prepaid expense, as they will benefit from it going forward after the closing of the transaction. At the same time, the seller receives a credit for this prepaid amount, reflecting that the seller has already covered that expense which the buyer will now inherit responsibility for after the sale.

This allocation is done to ensure that both parties are treated fairly in regards to costs associated with the property. The seller has prepaid certain expenses, so they should not have to bear the financial burden of those costs after the sale is finalized. Instead, these costs are effectively transferred to the buyer, which is why the buyer is debited and the seller is credited in the closing statements.