Many businesses have physical locations from where they operate. The need to have a business location compels businesses to either buy or rent a place for their operations. Accrued rent is therefore the sum of all rents that the tenant owes the landlord for making use of their property. Landlords normally receive rent in advance. However, when rent is due and the business fails to pay up, accrued rent occurs. If businesses pay their rent regularly and on time, there won’t be any need for an accrued rent account.
Accrued rent represents the sum of the amount owed in rent by a tenant to their landlord within a reporting period for which payment has not yet been made. Accrued rent is only recorded if there is a high degree of certainty that the tenant in question will pay the rent. In a situation where the tenant cannot pay and there seem to be no alternative method of payment, the expense should not be reported as accrued expenses.
The accounting method for recording accrued rent is quite straightforward. Entry for accrued expenses follows the debit and credit principle. On the part of the tenant, the rent payable account is credited while the accrued rent account is debited. Accrued rent account is debited because accrued rent is a liability. An increase in liability is recorded as a debit entry.
From the landlord’s perspective, accrued rent is an asset as it represents revenue that is yet to be paid. Accrued rent is therefore recorded as a debit entry on the accounts receivable and credit entry on the accrued rent account. An increase in assets is recorded as a debit which is why the accounts receivable which is an asset account are debited.
Businesses in adhering to an accrual accounting method should report the following wherein the business is a tenant:
- Rent payable that is recorded under current liability in the balance sheet. The amount that is payable to the landlord at each date on the company’s balance sheet should be reported
- All rents owed by the business to the landlords. This includes unpaid rents accumulated even when the business is not actively producing or rendering service. For each day the business occupies the property without paying for it, the rent should be accrued.
However, from the landlords perspective, the reporting should include the following:
- All rental income was supposed to be paid by the tenant but for which the landlord did not receive any payments.
- Rent receivables are recorded as current assets on the balance sheet. Rent receivables are recorded as current assets because they represent money that the landlord expects to receive.
The rent receivable account functions as an asset account that is used by the landlord to document the rent owed by tenants. Rent Receivables represent a total of all debts which the landlord has earned from the rental property but which have not been remitted by the tenant as of the time the balance sheet was prepared.
On the other hand, accrued rent is a liability account that a tenant uses to report the rent that has not yet been remitted to the landlord as of the date the balance sheet was prepared. Where the rent is meant to be paid on the second day of each month and the tenant meets up with the payment deadline, the rent receivable account will have a zero balance. However, if the tenant defaults in payment, the rent receivable account will be credited while the rent payable account will be debited.
If your business manages different properties and collects rent, then you must understand how accrued rent works and learn the right way of recording it. To ensure accurate reporting of transactions, it is required that you treat each rent that the company receives as a separate financial transaction.
There are set standards for reporting financial transactions in accounting. One of the standards that are recognized by most businesses is the Generally Accepted Accounting Principles (GAAP). Businesses that follow the GAAP principle in recording and reporting financial transactions make use of accrual accounting.
Accrual accounting makes use of two basic principles in making entries in the company’s book. The two principles necessitate the recognition of income within the period such income was earned. The implication is that all earned income whether you have received them or expect to receive them in the future are accounted for within the period the transaction occurred.
When using an accrual method of accounting, you need to set up a rent receivable account. The accounting principle mandates that the rental income is reported once a legal liability has been established on the part of the tenant. If therefore a tenant is expected to make payment on a particular day of the month, an entry has to be made in the account receivable. This entry is irrespective of whether the tenant made the payment on the agreed date or not.
Entries should be made to the general ledger. Remember that rent receivable is an asset. Therefore, to increase the balance, debit the rent receivable account. Where a tenant pays and you need to decrease the balance on rent receivable, credit the account.
To.make entries in the journal, debit the rent expense account and credit the accrued rent account. The format is shown below:
For instance, Habanaya limited December 1998 rent is $6,000. The company opts to make payment in February 1999. However, the company will pay a monthly rent of $500 to be remitted by the year-end. How will this be recorded in the journal?
|Dec 31, 1998||Rent||$6,000|
The monthly rent to be paid by the company will be recorded every month in the journal starting from January. The following entry applies:
|Jan 31, 1999||Rent||$500|
Once the accrued rent is paid, a journal entry is made to reflect the payment as follows:
|Feb 28, 1999||Accrued rent||$7,500|
Businesses prepare different kinds of reports at the end of each accounting year. These financial reports help the business to know how it fared in the accounting year and how it can better its operations. The sole of the report includes the income statement as well as the balance sheet. The income statement for example should reflect all the entries made in the journal within the accounting year. The amount recorded on the income statement does not change even if the payment is made years later.