Definition of Accrued Rent
Accrued rent is the amount of rent that has not yet been paid by the tenant or received by the landlord for a past period of time. [If the tenant always pays the monthly rent on the first day of every, there will never be any accrued rent.]
Under the accrual method of accounting the tenant should report:
- Rent Expense during the period of time that the space was occupied but was not paid, and
- A current liability Rent Payable for the amount owed to the landlord at each balance sheet date
Under the accrual method of accounting and assuming that the amount will be collected, the landlord should report:
- Rent Revenue (or Rental Income) during the period of time that the space was occupied but the rent was not received from the tenant, and
- A current asset Rent Receivable for the amount owed by the tenant at each balance sheet date
Example of Accrued Rent
A landlord and tenant agree to a monthly rent of $1,000 for office space beginning on October 1. Each month's rent is to be paid on the first day of the month. The tenant paid the monthly rent on October 1 and November 1, but asked the landlord if the December rent could be paid on February 1 (when the tenant will be receiving a large payment from a client). The landlord is assured that all rent due will be paid by February 1. Assuming that the tenant and the landlord use the accrual method of accounting, the following accrual adjusting entries are needed prior to issuing the December 31 financial statements:
- The tenant will debit Rent Expense for $1,000 and will credit Rent Payable for $1,000
- The landlord will debit Rent Receivable for $1,000 and will credit Rent Revenues for $1,000
