Journal entry for accrued rent income

Introduction

In business, when we rent our available property or equipment, we may come across a situation where we only receive a rental fee after a certain period has passed. In this case, we need to make the journal entry for accrued rent income at the end of the accounting period, even though we have not received the cash payment yet.

Though we usually receive the cash in advance for the rental service that we provide, there may be a situation where we won’t receive any cash until some time has passed. In this situation, we still need to record our rental income in order to comply with the accrual basis of accounting.

This is due to, under the accrual basis of accounting, the revenue should be recorded when is earned regardless of the time of the cash received. And in accounting, the rental income or rental revenue is earned through the passage of time. Hence, at the end of the accounting period, we should have earned a portion of rent income regardless of when we will receive the cash payment.

Likewise, even though we have not received the cash payment yet, we still need to make the journal entry for the accrued rent income when we have already earned it. Later, when we receive the cash payment for the rental service, we can make another journal entry to clear the receivables with the cash received.

Journal entry for accrued rent income

We can make the journal entry for accrued rent income by debiting the accounts receivable and crediting the rent income account.

In this journal entry of accrued rent income, both total assets on the balance sheet and total revenues on the income statement increase by the same amount.

Later, when we receive the cash payment for our rental equipment or property, we can make a journal entry to clear the accounts receivable with the debit of the cash account and the credit of accounts receivable.

This journal entry is made to account for the cash received as well as to eliminate the accounts receivable that we have recorded previously for the rental fee that the client owes.

Accrued rent income example

For example, we have an available office space that we can rent out to earn extra income for our business. Likewise, on December 1, we have rented out this office space for a fixed fee of $2,000 per month to one of our friends who have a close business relationship with us.

However, for some reason, we will only receive our first rental fee on January 1 of the next month. And as we need to close the year-end account on December 31, we need to also record the accrued rental fee that we have already earned for a month during December.

In this case, on December 31, we need to make the journal entry for accrued rent income of $2,000 that we have earned by debiting this amount into the accounts receivable and crediting the same amount into the rent income account.

December 31:

In this journal entry, both our total assets and total revenues increase by $2,000 as of December 31. Likewise, if we do not make this journal entry of accrued rent income, both total assets on the balance sheet and total revenues on the income statement will be understated by $2,000.

Later, on January 1, when we receive the cash payment of $2,000 from our friend for the rental fee, we can make the journal entry to clear the accounts receivable that we have recorded as below:

January 1:

This journal entry does not impact the total assets on the balance sheet as a whole. This journal entry is made to clear the $2,000 of the accounts receivable with the $2,000 cash that we have received on January 1.