One of the most common accrual entries required at each accounting period end are rent accruals.
The accruals required for rent are generally quite simple because the amounts and periods involved are clear (they are usually set out in a lease agreement in clearly defined terms).
What is the Purpose of a Rent Accrual?
Rent accruals allow us to recognise a rental expense in the profit and loss account ahead of invoice receipt and also establish a creditor balance on the balance sheet linked to this specific rent expense.
By putting the rent accrual in place, this ensures that the appropriate rental expense and creditor have been recognised within the company’s financial statements for the period, thus ensuring that the amounts recorded are accurate.
Why is a Rent Accrual Required
As noted above, putting a rent accrual in place ensures that all amounts within the financial statements are accurate and give a true representation of the company’s performance for a specific period.
The accrual ensures that the amounts are recorded even when an invoice has not been received which ensures that the accruals concept of accounting has been appropriately followed.
What Are the Journal Entries for Rent Accruals?
The journal entry for a rent accrual is as follows:
- Dr Rent Expense (profit and loss account)
- Cr Accruals (balance sheet)
The above double entries are required to recognise a rent accrual. We will take a look at some specific examples with numbers further in this article.
The journal entries above should be posted to ensure that, even when a rent invoice has not been received, the correct rental expense for the period has been recorded in the profit and loss account and that an appropriate creditor (in the form of an accrual) has been recognised on the balance sheet.
What Journal Entry Should be Posted When the Rent Invoice is Received?
The key point behind the above journal is that this should be posted to recognise the rent expense, when the rent invoice has not been received.
When the rent invoice is actually received a subsequent journal entry is required to reverse the accrual and appropriately recognise the invoice within trade creditors. This journal entry is as follows:
- Dr Accruals (balance sheet)
- Cr Trade Creditors (balance sheet)
As we can see above – the journal entry has a balance sheet impact only, with no impact on the P&L. This further supports the fact that the accrual appropriately recognised the rent expense in the correct period and therefore, once the invoice comes in this only results in a reclass within the balance sheet, with no further profit/loss impact.
Rent Accrual Journal Entry Example
For this example we will look at a business, ABC Ltd, that pays a monthly rent of £500 for the use of a warehouse.
The owner of the warehouse only issues one annual invoice at the year end of December and therefore each month ABC ltd must record a rent accrual to ensure that the rental amounts are appropriately recorded in the monthly management accounts.
At the January month end the following rent accrual journal is required:
- Dr Rent Expense – £500 – (profit and loss account)
- Cr Accruals – £500 – (balance sheet)
This journal recognises the rent expense incurred for using the warehouse in January, of £500 within the profit and loss account and also recognises the liability of £500 on the balance which will eventually be paid to the landlord when the final year end invoice is issued.
What happens throughout the year?
This accrual will continue to build throughout the year until the year end accrual balance will sit at £6,000 (12 months * £500)
This will also ensure that an equivalent £6,000 worth of rent expense has been recognised within the profit and loss account.
When the final year end rent invoice is received the following journal entry is required:
- Dr Accrual – £6,000 – (balance sheet)
- Cr Trade Creditors – £6,000 – (balance sheet)
Once the year end rent invoice comes in from the landlord, this double entry clears the liability out of the accruals account and reclasses it to sit within trade creditors. If you need more help on the journal entries required to record a purchase invoice, please see our guide on this here.
What entries will be made when the invoice is paid
The final step in this process is the actual cash payment of the invoice. The journal entry required to record this payment is as follows:
- Dr Trade Creditors – £6,000 – (balance sheet)
- Cr Cash – £6,000 – (balance sheet)
This journal removes the liability from the balance sheet and records the cash payment out by reducing the amount of cash held on the balance sheet.
Summary
To summarise, the journal entries required to recognise rent accruals are simple once you understand the basic principles and by putting rent accruals in place, the true rent expense incurred for each accounting period is recorded accurately.