Rent income refers to revenue earned from leasing out properties, such as commercial spaces, to third parties.
Rent Income is an income account. It is presented in the income statement.
If the company's income statement presents "Income from Operations" and "Other Income" separately, the accountant must know if renting out properties is part of the normal operations of the business or not to be able to know where to include Rent Income.
Advanced payments made by the lessee should not be part of Rent Income. Rather, advances should be recorded as liabilities (under Unearned Rent Income or Advances from Lessee). It is recorded as income only when the rental service is completed, i.e. the rental period has lapsed.
Cash deposit received from the lessee also does not constitute rent income. They are liabilities since the amount is normally refundable at the end of the contract.
The pro-forma entry for rent income (with no advances) is:
|Dr.||Cash or Rent Receivable||xx.xx|
Rent Income is recorded by crediting the account. Cash is debited if cash is received. Rent Receivable is debited if it is to be collected at a later date.
When advanced rentals are received from the lessee, the journal entry would be:
|Cr.||Unearned Rent Income||xx.xx|
After the period paid for by the advanced payment has lapsed (or when preparing adjustments at the end of the accounting period), the journal entry would be:
|Dr.||Unearned Rent Income||xx.xx|
1. On December 31, 2021, XEJ Company collected $10,000 for renting out a part of its office building from December 1 to December 31.
2. On November 1, 2021, GORDON Company received $27,000 (9,000/month) advanced payment from a lessee for the rental of an extra commercial space of the company's building for 3 months. The entry to record the receipt of the advanced rent would be:
|Cr.||Unearned Rent Income||27,000|
Now - on December 31, 2021, suppose it is the end of the accounting period, an adjusting entry should be made to reflect the lapse of the rental period and transfer some of the unearned rent income to earned rent income (i.e., 2 months from Nov 1 to Dec 31). Adjusting entries are necessary at the end of every accounting period to update account balances. The adjusting entry would be:
|Dr.||Unearned Rent Income||18,000.00|
On January 31, 2022, the end of the lease period, the entry to record the rental income would be:
|Dr.||Unearned Rent Income||9,000.00|
The above entry may also be done at the end of the accounting period as an adjusting entry.
Note: The adjusting entry to transfer Unearned Rent Income to Rent Income may be done at the end of the year or at the end of every month. Monthly or quarterly adjustments must be made if the company wants to come up with monthly/quarterly balances for more accurate interim financial statements.