How Do You Account For Accrued Rent?

How Do You Account For Accrued Rent

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How Do You Account For Accrued Rent

Accrued rent is a type of accrued expense, which is an expense that has been incurred but not yet paid. Accrued rent happens when a company uses a space before it pays the rent for it.

Here’s how you account for accrued rent:

  • At the end of the accounting period before payment: If rent is owed but hasn’t been paid by the end of the accounting period (for example, at the end of the month or quarter), the company needs to record the obligation as accrued rent. This involves making the following journal entry:Debit: Rent Expense (Income Statement) Credit: Accrued Rent (Liability on the Balance Sheet)
  • When the payment is made: The payment of rent reduces the accrued rent liability and reduces the company’s cash balance. The company would make the following journal entry:Debit: Accrued Rent (Liability on the Balance Sheet) Credit: Cash/Bank (Asset on the Balance Sheet)

Let’s consider an example: A company’s monthly rent is $1,000, payable on the first day of the following month. If the company is preparing its financial statements on December 31st, and the rent for December hasn’t been paid yet, the company would record a $1,000 rent expense and a $1,000 accrued rent liability.

At the end of December:

Debit: Rent Expense $1,000
Credit: Accrued Rent $1,000

When rent is paid on the first day of January:

Debit: Accrued Rent $1,000
Credit: Cash $1,000

This process ensures that rent expenses are recognized in the period in which the company used the rental space, aligning with the accrual basis of accounting principle, which requires recognition of income and expenses in the period they are earned or incurred, regardless of when cash is exchanged.

Example of How to Account For Accrued Rent

Suppose a company called XYZ Corp. rents an office space for $5,000 per month. The rent is due on the 15th of the following month. If the company’s financial year ends on 31st December, and they are preparing the financial statements, they would need to record the rent for December as an accrued expense since they’ve used the office space in December but haven’t paid the rent yet.

Here is how the journal entries would look:

On December 31st (at the end of the accounting period, but before payment is made):

Debit: Rent Expense $5,000 (in the Income Statement)
Credit: Accrued Rent $5,000 (in the Balance Sheet as a current liability)

This entry recognizes the rent expense incurred in December (which will be paid in January) and records it as a liability.

On January 15th (when the payment for December’s rent is made):

Debit: Accrued Rent $5,000 (in the Balance Sheet, reducing the liability)
Credit: Cash or Bank $5,000 (in the Balance Sheet, reducing the asset)

This entry reflects the payment of the accrued rent, decreasing the company’s cash (or bank balance) and removing the liability from the company’s books.

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