Journal Entry Question - Rent in Advance

by Judy
(Jenkins)

Q: LaBouche Corporation owns a warehouse. On November 1, it rented storage space to a lessee (tenant) for 3 months for a total cash payment of $600 received in advance.


Journalize the entry for this transaction.

rent income received in advance A:
The journal entry here would be:

Debit: Bank/Cash..................$600
Credit: Rent received in advance (liability).............$600


The income received in advance is not income.

The income received in advance is a liability.

Here's an example of how to think with this. Let's say your friend gave you $100 to buy something for her from overseas in Europe. But you're only going overseas in 3 month's time. For those 3 months before you actually go to Europe and buy the product and give it to your friend, it's kind of like you owe her the money. Because you haven't fulfilled your side of the transaction yet... Make sense?

Later on, when we reach the month for which the rent payment (which we already received) actually belongs, we record the income.

For the example above, it's $200 rent income per month. When we reach 1 December, we record:

Debit: Rent received in advance (liability).............$200
Credit:Rent income......................................................$200


In other words, we cancel out $200 of the rent in advance (liability) and move it over to rent income. We are now showing that rent income for December is taking place.

The way we record the above transactions are all based on the accrual basis of accounting, where income and expenses are recorded in the periods to which they relate, and not necessarily when cash is received or paid.

Note that this kind of transaction has a few names - it is generally known as prepaid income or income received in advance.

See below for more comments, questions and answers related to this topic.

- Michael Celender


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Comments for Journal Entry Question - Rent in Advance

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Advance Rent Bill
by: A bhat

Received shop rent bill for 5 years in the current year of 2020, total amount five lakh (500,000) up to 2025. But I have to make the payment monthly.

How do I enter the bill and which heading should I put the total amount of rent under?

For example I will credit the building owner for 5 Lakhs (500,000) but which heading to debit?

This is a very strange situation. To receive the rent bill for the next 5 years is crazy.

If you're crediting the building owner I assume you are recording a liability (rent owing?). But this doesn't make sense to me. This is incorrect if you're paying rent on a monthly basis.

If you're making the payment each month then I would just do a regular journal entry each month, like this:

Dr Rent
Cr Bank/Cash

I would not record rent paid in advance if you're just paying each month.

Best,
Michael C.
Accounting-Basics-for-Students.com

Shop Rent Bill in Advance for 5 Years
by: Azher

Received 5 years of shop rent bill in advance in current year, on a same particular date. How to pass the journal entry?

Rent Expense Paid in Advance
by: Anonymous

What about your paying the rent in advance for that month? You paid your rent on the 2nd of the month while it is not due until let's say 30. Would that be prepaid or rent expense?

On the 2nd of the month record a prepaid expense (asset/debtor account). Then on the 30th record the actual expense and cancel out the prepaid expense.

- Michael

Journal
by: Anonymous

cash A/c Dr
To Rent received in advance A/c cr

Request For Correct Answer
by: Anonymous

I want to learn with the correct answer by author (site) for all questions. It's really effectively.

I answered this question now, see above.

Best,
Michael Celender

journal
by: Anonymous

Cash Account - Dr.
To Le Brocher Account

liability
by: Anonymous

it is a liability account

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