How a Rent Payment Affects the Accounting Equation
A company’s payment of each month’s rent reduces the company’s asset Cash. This is recorded with a credit to Cash.
If the payment is for the current month’s rent, the second account is to the temporary account Rent Expense which will be debited. The debit to Rent Expense also causes owner’s equity (or stockholders’ equity) to decrease. Eventually, the balances in the company’s temporary accounts will actually be transferred/closed to the owner’s capital account (or to a corporation’s retained earnings account within stockholders’ equity).
To recap the above, the monthly rent payment keeps the sole proprietor’s accounting equation, Assets = Liabilities + Owner’s Equity, in balance because it reduces the company’s assets and it reduces the company’s owner’s equity.
