Period-End Close SeriesDeferred Rent Asset/Liability

Bill Hanna, CPADate prepared: September 22, 2015

Why it occurs

The cost of rent has been incurred, but not yet paid or

vice-versa.

Most frequent example

Rent holidays: Landlord gives a rent-free initial period typically between 1-

6 months.

Step 1

Determine Monthly Rent Expense

Monthly Rent Expense =

Total Rent Payments Over Lease Term

Number of Month

Step 2

Determine whether an Asset or Liability

Deferred Rent AssetRent Expense – Rent Payment = Negative

Deferred Rent LiabilityRent Expense – Rent Payment = Positive

ExampleEinstein LLC enters a lease agreement for an office space

The TermsLease term 2 yearsLease payments Year 1 = $10,000/month

Year 2 = $11,000/month

Total Rent Payments = $10,000 x 12 + $11,000 x 12 = $252,000

Monthly Rent Expense = 252,000/24 months or $10,500 per month

So as you see….

During Year One: We pay 10K, while the actual expense is 10.5K(Creating Def. Rent Liability)

During Year Two: We pay 11K, while the actual expense is 10.5K(Creating a reduction to the Def. Rent Liability)

Here is the table to break it downYear Month Rent Rent Monthly Cumulative

Expense Payment Deferred Rent Deferred Rent1 1 10,500 10,000 500 5001 2 10,500 10,000 500 1,0001 3 10,500 10,000 500 1,5001 4 10,500 10,000 500 2,0001 5 10,500 10,000 500 2,5001 6 10,500 10,000 500 3,0001 7 10,500 10,000 500 3,5001 8 10,500 10,000 500 4,0001 9 10,500 10,000 500 4,5001 10 10,500 10,000 500 5,0001 11 10,500 10,000 500 5,5001 12 10,500 10,000 500 6,0002 13 10,500 11,000 -500 5,5002 14 10,500 11,000 -500 5,0002 15 10,500 11,000 -500 4,5002 16 10,500 11,000 -500 4,0002 17 10,500 11,000 -500 3,5002 18 10,500 11,000 -500 3,0002 19 10,500 11,000 -500 2,5002 20 10,500 11,000 -500 2,0002 21 10,500 11,000 -500 1,5002 22 10,500 11,000 -500 1,0002 23 10,500 11,000 -500 5002 24 10,500 11,000 -500-

252,000 252,000-

The Monthly Journal Entries

During Year One:

Accounts Payable enters this:Dr. Rent Expense $10,000

CR. A/P $10,000Month-end adjusting entry (to increase expense and liability):Dr. Rent Expense $500

CR. Def. Rent Liab. $500

During Year Two:

Accounts Payable enters this:Dr. Rent Expense $11,000

CR. A/P $11,000Month-end adjusting entry (to decrease expense and liability):Dr. Def. Rent Liab. $500

CR. Rent Expense $500

Thank You!