What are Rent Expenses?

Learn about Rent Expenses with Ranbir Kapoor

Case Breakdown: Movie Ajab Prem Kee Ghazab Kahani

The scene depicts Prem’s (played by Ranbir Kapoor) friends’ convincing him to rent out a flat. This would enable them to earn a commission on it. In the very next scene, Prem and his friends try to rent the flat to Pintoo uncle. Pintoo uncle takes the flat on rent.

In this blog, Learning Perspectives will explore the meaning of rent expenses.

What are Rent Expenses?

Total cost of using a rental property are known as the rent expenses. In an organization, cost of these rented properties are shown in the reporting period. Rent is paid to the owner of the property on a monthly basis. Organizations can take property on lease as well.

These expenses are large in nature and are reported in the income statement of the company. Rent expenses are debited to the profit and loss account or the income statement.

Many a times, organizations pays the rent in advance, which means the rent of the office or a building is paid in lump sum to the owner. This advance rent becomes an income for the owner. This is true, even when the situation is reversed. That is, when the organizations receive rent in advance for their property. They record it as a prepaid asset.

Deferred Rent takes place when the company is given one or more free period mostly in the case of a lease agreement. For example: in a 1 year lease agreement, first month is free, with a rent of Rs. 10,000 per month. Then the total cost of the lease would be Rs. 10,000*11= Rs. 110,000

Expense that would be charged to the income statement would be: Rs. 110,000/12= Rs. 9,167. Now, irrespective of the payment Rs. 9,167 would be debited to the profit and loss account even for the first month.

Journal Entries:

Let’s understand how the journal entries for rent look.

When a company paid a rent of Rs.60,000 in advance for the entire year (Rs. 5,000 per month) on 1st January 2020. Here the entry will be:

01/01/2020                         Prepaid Rent  A/c          Dr.      60,000

To Cash                                                60,000

Prepaid rent A/c is an asset account and Rs. 60,000 is recorded here because 60,000 will act as an asset on 1st January as Rent for the entire year has been paid.

Benefit from using the rented space occur evenly over time, with 1 month’s cost attributable to January, February, March and so on. Let’s say that Rs. 60,000 is paid on 1st January, 2020. As January expires, Rs. 5,000 also expires, hence on 31st January entry will be:

31/01/2020                          Rent Expenses A/c           Dr.      5,000

To Prepaid Rent                            5,000

Written by: Ms. Gitika Chandra

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