Journal Entry Question - Rent in Advance

by Judy
(Jenkins)

Q: LaBouche Corporation owns a warehouse. On November 1, it rented storage space to a lessee (tenant) for 3 months for a total cash payment of $600 received in advance.

Journalize the entry for this transaction.

A: The journal entry here would be:

Debit: Bank/Cash..................$600
Credit: Rent received in advance (liability).............$600

The income received in advance is not income.

The income received in advance is a liability.

Here's an example of how to think with this. Let's say your friend gave you $100 to buy something for her from overseas in Europe. But you're only going overseas in 3 month's time. For those 3 months before you actually go to Europe and buy the product and give it to your friend, it's kind of like you owe her the money. Because you haven't fulfilled your side of the transaction yet... Make sense?

Later on, when we reach the month for which the rent payment (which we already received) actually belongs, we record the income.

For the example above, it's $200 rent income per month. When we reach 1 December, we record:

Debit: Rent received in advance (liability).............$200
Credit:Rent income......................................................$200

In other words, we cancel out $200 of the rent in advance (liability) and move it over to rent income. We are now showing that rent income for December is taking place.

The way we record the above transactions are all based on the accrual basis of accounting, where income and expenses are recorded in the periods to which they relate, and not necessarily when cash is received or paid.

Note that this kind of transaction has a few names - it is generally known as prepaid income or income received in advance.

See below for more comments, questions and answers related to this topic.

- Michael Celender


Related tutorials:

• Define Income


• Define Liabilities


• Accrued Income and the Accrual Basis of Accounting

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