Rent Payable Journal Entry

Rent is the cost that company spends to use someone’s property, office, building, and other types of fixed assets. The most common form of rent is the rent of property which company rents a building or office from the landlord.

It is the fixed expense that company signs a contract with the landlord for at least a year. The rental expense will be fixed during the year or it may be slightly increased depending on negotiation. It will not change depending on the company’s business activity. In management accounting, it is considered as a fixed cost.

The company can save money by renting the property rather than purchasing the whole assets. It requires a huge amount of capital to purchase an office, building, or shop. However, they can rent this property from the owner and save the capital for the operation which is their specialist. They can generate more revenue by focusing on the business activity instead of paying a huge cost on purchasing fixed assets.

Base on accounting principle, the company need to record revenue and expense base on the occurrence rather than cash paid. The payment on the rental contract may be different based on the arrangement between tenant and property owner. It may require payment monthly, annual, and so on. However, the company requires to record monthly rental expenses which are suitable for most of the business. It has to ensure that proper rental expenses are included in the annual financial statement. Any amount that is not yet paid to the landlord, needs to record as rent payable.

Rent payable is the amount of rent that company has not yet paid to the property owner. It will be present as current liabilities on the balance sheet. And it will be reversed back when the company makes a payment which depends on the rental contract. Any payment in advance will be recorded as prepaid rent.

Rent Payable Journal Entry

Rent payable incurs when the company records rental expense and does not yet make any payment to the property owner. The journal entry is debiting rental expense and credit rent payable.

Rental expense will be present on the income statement and it will reduce the company profit during the month. It is a record based on the consumption of rental services. Rent payable is the present obligation that company has toward the landlord. It will present as current liabilities on the balance sheet.

When the company settles rent with landlord, they need to debit the rent payable from balance sheet. The journal entry is debiting rent payable and credit cash.

Rent payable is the liability, so when we debit it means we decrease the balance from balance sheet. Cash also decreases when company uses it to settle with the landlord.

Rent Payable Journal Entry Example

ABC is a consulting company that provides many services to small businesses. The company rent office from the landlord costs $ 2,000 per month.  Base on the rental contract, ABC needs to pay the rental fee on 5^th of next month while the contract term is 5 years.

The company needs to prepare a monthly financial statement, please prepare a journal entry for month-end.

At the month-end, the company needs to record expenses and revenue to prepare a financial statement. So they need to record rental expenses even the payment is not yet made.

The journal entry is debiting rental expense of $ 2,000 and credit rent payable $ 2,000.

Rental expense is present on income statement and rent payable is the current liability that is presented on balance sheet.

On 5^th of next month, ABC needs to pay the landlord and the rent payable will be reversed as well. The journal entry is debiting rent payable $ 2,000 and credit cash $ 2,000.

The transaction will remove the rent payable from the balance sheet. It is the liability, so the balance decrease when we debit.