Rent Paid Journal entry results in
- Debiting Rental expense
- Crediting Rent Liability Account.
Rent is a payment for property use.
What does Properties mean?
House, Buildings, Machinery, Car, etc.
Is there any limitation on purpose?
Nope.
It can fall into any of the following purposes
- Industrial
- Commercial
- Residential purpose.
Therefore, there are no limitations for the purpose.
Nowadays, this Leasing business is expanding quite rapidly.
The rental business moved online like
Table of contents
How to record Journal entries?
First, let’s learn how to record journal entries by following the steps below.
- Identify the Company at which the Journal entries are to be recorded
- Identify the GL Accounts in the transaction
- Understand the nature of GL Accounts
- Apply the Rules of Accounting
- Record Journal Entry.
Also Read: Commission Receivable Accounting
Example to understand the steps:
We will understand all these steps with an example to ease the learning process.
Flop Company rents wooden furniture, with lease payments due each month. Hit Company took the sofa on rent for 12 months at $ 3,000 per month, with a security deposit of $50,000, refundable at the end of the rental tenure.
Recommended Article: Fictitious Assets (also called Fake Assets)
Steps to record Rent Paid Journal Entry:
Consider the above steps as questions and the answers below.
Step 1. We are recording the journal entries in the books of Hit Company.
Step 2. This transaction involves the GL accounts Rent A/c, Rent Payable A/c, Security Deposit, and Bank A/c.
Step 3 – Nature of GL accounts:
We need to classify the above accounts as any of these: Asset, Liability, Income, Expense, Losses, and Gains
4. Applicable Accounting Rules:
Rent Payable – Liability
Security Deposit – Receivable (Asset)
Bank – Asset
4. Applicable Accounting Rules:
Accounting has three rules
- Personal Account Rules
- Real Account Rules
- Nominal Account Rules
The accounts involved in this example are Asset, Liability, and Expenses. So, the applicable accounting rules are Real Account for Liability & Assets, and Nominal Account for Expense.
Real Account Rule: Debit what comes in and Credit what goes out
Nominal Account Rule: Debit the Expenses and Losses, and Credit the Incomes and Gains
5. Recording the Journal Entry:
1) Security Deposit JE:
The Hit Company needs to pay the Liability and Security deposit per the above rules. The Hit company pays the Security deposit now and will get that as a refund at the end of the rental tenure. So, the Security deposit is receivable, and Cash from the Bank will be paid.
Per Rules,
Security Deposit is a debit because it’s the amount that comes back
The bank is credited because it’s the amount that goes out.
(Being Security Deposit made as per the rental agreement)
2) Rental Expense JE:
The Rental liability is not refundable. Therefore, Rent Payable is a Credit because it goes out, and Rent is a debit because it’s an expense.
(Being Rent accrued for the April month)
3) Rent Paid Journal entry:
The rent-paid journal entry will debit the Rental Liability, which is already recorded above, and credit the Bank GL. Thus, it nullifies the rental liability, and the resulting entry debits the rent and credits the Bank GL.
Frequently Asked Questions:
How do you record Rent paid in accounting?
Rent paid will be debited with a corresponding Credit to the Bank Account if paid immediately or credited to the Rent Liability to record the accrual entry.
Does rent paid fall under debit or credit in a journal entry?
Rent is an expenditure account and, in nature, a Nominal Account. Per the Golden rules of accounting of Nominal Account, Debit all the Expenses & Losses and Credit all the Gains & Incomes. So, we will debit the rent expense.
What is Rent paid in accounting?
Rent is an expenditure for the business. Therefore, it will be included in the Statement of Profit and Loss.
What is an Advance Rent Paid Journal Entry?
Advance rent is an asset to the paying entity. Thus, the advance rent GL will be on the debit side with a corresponding credit to the bank GL.
How do you record Rent in a journal entry?
Rental expenses are recorded as a debit in the journal entry. This is because rent expense is a nominal account. Per the Nominal Account rule, all expenses and losses must be debited. Thus, rent expense will be on the debit side of the entry.
Is rent liability in accounting?
The rental transaction involves Rent GL and Rent Payable GL. Any business needs to pay rent to use any commercial space or property. So, rent is an expense, and rent payable will be a liability.
What kind of expense is a rent payment?
The answer depends on the nature of the business. If the rental premise is critical for business operations, it falls under operational or direct expenses. For example, building a rental car showroom is a direct expense. If the rent expense is ancillary to the functioning of the business, then it’s an indirect expense. Therefore, we need to understand the nature of the industry to determine the expense type.
Conclusion for Rent Paid Journal Entry:
Rent Payments are expenses to the business. We will record the journal entry by debiting the rent expense and crediting the rent payable (Liability). Generally, rental agreements will have a security deposit tag. Such a security deposit is refundable at the end of the rental agreement. The above example entries provide an overview of the concept. Thus, it isn’t very different from a regular expense journal entry.
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