What Is the Balance in a Rent Expense Account?
Rent expense exists as an income statement account, meaning rent expense will appear on a company's income statement. Rent expense is an operating expense that may be listed in the administrative or selling expense section of the income statement. A company's rent expense account has a normal debit balance. This means that a debit increases the amount found in the rent expense account, while a credit decreases the amount in a rent expense account.
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Significance
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Rent expense represents the cost a company must pay to occupy space. The cost of rent is negotiated and agreed upon by the landlord or owner and the company renting the space. The balance in a rent expense account represents the amount of rent a company paid during the period indicated on the income statement. The accrual basis of accounting states that a company must report rent expense during the time indicated on the income statement heading regardless of whether cash was paid during the period, as explained by the Accounting Coach website.
Journal Entry
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A company must record rent expense in the general journal. The date when the expense occurred must appear in the general journal, along with the amount of rent charged. For example, a company that pays $1,000 a month for rent must debit rent expense for $1,000 and credit cash for the same amount. Debiting rent expense increases the amount of the expense and crediting cash decreases the company's cash. This transaction indicates the rent expense for the month has been paid.
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Prepaid Rent
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Many companies pay rent in advance as opposed to paying rent month-to-month. In this scenario, a company establishes an account for prepaid rent. Prepaid rent is a current asset that the company expects to use within a one year period. Since prepaid rent is an asset, the account has a normal debit balance and appears on the balance sheet with other company assets. A company that pays rent in advance must debit the prepaid rent account and credit cash to indicate the amount prepaid for rent. For example, a company that pays $12,000 to cover the rent for an entire year will debit prepaid rent for $12,000 and credit cash for the same amount.
Adjusting Entry
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When a company prepays rent, an adjusting entry must be entered into the general journal to indicate usage of the prepaid rent amount. The adjusting entry involves a debit to the rent expense account, which increases the company's rent expense for the period indicated by the income statement heading. The second part of the adjusting entry requires a credit to the prepaid rent account, which decreases a company asset. This entry decreases the prepaid rent account based on the expiration of rental months.
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