Rent Expense refers to the cost incurred for the right to use a commercial space or a property belonging to another entity.
Rent Expense is an expense account. It is part of operating expenses in the income statement. If the company classifies expenses into administrative and selling expenses, rent expense should be apportioned based on the space used by the administrative department and the selling department.
Advanced payments given to the owner of the property are considered as assets, i.e. "Prepaid Rent". They become part of "Rent Expense" as the rental period lapses.
1. When no advanced payments are made and rent is paid after every use, the entry would be:
2. If the business pays for advanced rentals, the journal entry would be:
Upon lapse of the rental period (or when adjustments are made monthly, quarterly, or annually), the adjusting journal entry would be:
The above entry is made to transfer an amount from "Prepaid Rent" to "Rent Expense" since the rent paid for, or a part of it, has already been consumed.
1. At the end of every month, PINK Company pays $12,000 to JICO Corp. for the use of the latter's building. The journal entry to record the monthly rent would be:
2. On December 1, 2020, KINDRED Corp. paid $30,000 for the use a commercial space while its building is under renovation. It shall cover a period of 3 months from December 1, 2020 to March 1, 2021. The journal entry to record the payment would be:
On December 31, 2020, the end of the accounting period, 1 month worth of rental has already been used up. Hence, an adjusting entry to record rent expense should be made. The adjusting entry would be:
|Dr.||Rent Expense (30,000 x 1/3)||10,000.00|
Adjusting entries are prepared at the end of every period. Companies that prepare monthly reports need to prepare monthly adjusting entries. Rent expense, like any other expense, is recognized in the period it has been used regardless of when the amount was paid.