Accounting for unearned rent
/How Unearned Rent Occurs
When a landlord enters into an agreement to rent space to a tenant, a common provision of the rental agreement is that the tenant will pay the landlord at the beginning of the month. This payment is associated with the month at the beginning of which it is paid. The landlord typically records these payments as rental income in the month in which the cash is received.
But what if the tenant were to pay slightly earlier, at the end of the preceding month? In this case, the landlord must record the receipt of cash, but cannot yet record rental income, since it has not yet earned the rent. Earning the rent will occur in the next month, which is the period to which the payment applies. Instead, the landlord records unearned rent.
Related AccountingTools Courses
Property Management Accounting
How to Account for Unearned Rent
To account for this unearned rent, the landlord records a debit to the cash account and an offsetting credit to the unearned rent account (which is a liability account). In the month of cash receipt, the transaction does not appear on the landlord's income statement at all, but rather in the balance sheet (as a cash asset and an unearned income liability).
In the following month, the landlord earns the rent, and now records a debit to the liability account to clear out the liability, as well as a credit to the revenue account to recognize the revenue. The impact of the transaction now appears in the income statement, as revenue.
The accounting noted here only applies under the accrual basis of accounting. Under the cash basis of accounting, the landlord does not have any unearned rent. Instead, any rent payments received are recorded as income at once.
Example of Accounting for Unearned Rent
Emerson charges rent of $4,000 to a tenant for his use of an apartment for one month. The tenant is going away on vacation, and so pays the rent a week early. This is unearned rent for Emerson, who records the payment as a $4,000 debit to his cash account and a $4,000 credit to his unearned rent (liability) account.
The rental period is completed a month later, so Emerson has earned the rent through the passage of time. He then recognizes the rent payment by debiting the unearned rent account for $4,000 and crediting his revenue account for the same amount.