Rent received in advance is the amount of rent received before it was due, but the landlord has yet to get the connected benefits equal to the advance obtained. The amount the landlord received from the tenant could not be fully recognized as rental income since the service is not provided yet.
Because it is revenue received but not generated, it is recorded as a “current liability” on the balance sheet when the landlord receives that payment from its tenant.
Rent received in advance also refers to when a tenant pays rent beyond the current rental period. If the rent is due on the first day of every month, and you bear all at once on January 1 for the year, you’ve paid rent in advance. Rent received in advance is unearned revenue, but it’s not revenue because you haven’t earned it yet.
Rent received in advance refers to any amount received the payment for a period in the future. If you accept someone’s rent payment before the beginning of their lease, those advances received should be recorded as unearned revenue on the balance sheet.
If a tenant pays an entire year’s rent when they move into an apartment, one lump sum of money is considered a receipt of advance rent.
When recording advanced rent, it’s important to remember that this money has been paid for rent that has not yet been earned. That means this money is being held as an asset until it can be attained. In short: advanced rent is not revenue and should not be recorded.
Journal Entry for Rent Received in Advance
The following will be the journal entry for rent received in advance:
So based on the journal entry above, you should debit to cash or bank on the amount that you are receiving from the customer that paid in advance, then you should also record the contra entry as the unearned revenues. This unearned revenue will release to revenues every month when the tenant uses the space they are renting.
Consider an ABC company renting out a part of its building that was not used to earn some extra income from it. The monthly rent was fixed at $2,000. ABC company follows a calendar year as their accounting year.
The tenant, therefore, paid four months of advance rent to the ABC company, i.e., the tenant gave his advance rent for June, July, August, and September.
While receiving the Rent in May. The journal entry would be:
Even though the company received $8,000 of rent in advance, the company could not recognize all of these amounts as rent revenues. This is advance rent will be posted each June, July, August, and September separately as follows:
|Rent received in advance (Prepayment)||$2,000|
Furthermore, rent received in advance is deducted from the amount of rent in the income and expenditure/expense account. After that, the amount received in advance is posted on the liability side of the Balance sheet.
On December 30, XYZ Ltd. received office rent from its tenant in cash of $45,000 (15,000 x 3) for the next three months, i.e., January, February, and March. The accounting period followed by XYZ Ltd. is from January to December.
The following are journal entries that must be entered into XYZ Ltd.’s books:
December 30 – Journal entry at the time of rent received
31 December – Journal entry for adjustment of the rent received in advance at the end of the current accounting period
|To rent received in advance.||$45,000|
January 1, February 1 & March 1 – Rent income allocated to each of the three months
|Rent received in advance||$25,000|
Benefits of Rent Received in Advance
Benefits for Landlord
There are several benefits of receiving advance rent from a tenant. These benefits are as follows:
- For landlords, recording Rent received in Advance increases cash flow. Since cash flow enables business owners to pay bills and continue running their companies, having a steady flow of incoming funds is significant. In addition, this method also provides a means for landlords to track how much money they will receive over several months or even years at a time.
- This method allows landlords to track which tenants are not paying their rent on time – and who might be neglecting their obligations altogether. This can enable property management companies to take legal action against delinquent tenants as soon as possible.
- A tenant cannot quickly leave you unless he pays all your due rent. This helps in reducing the number of vacant houses on your property.
- Advance payment implies that you have already collected a portion of your rental income for future months, which reduces your risk of default by tenants and makes you sleep peacefully at night.
- When you receive advance payment, you can use this money to invest in other projects or even reinvest it back into your business to improve and generate more revenue.
- If you don’t have enough cash to pay your mortgage on time, you can also use this money to pay off your mortgage.
Benefits for Tenants:
There are several benefits of paying advance rent to the landlord as a tenant. These benefits are as follows:
- For tenants, paying Rent in Advance means not worrying about remembering when your next payment is due.
- Paying all of your rent upfront means that there will be no monthly bills to worry about—you’ll always know exactly how much money you have available to spend, and no surprise, expenses will appear when you least expect them. This is very helpful for people on a fixed income since it helps them plan their budget ahead of time.
- Paying Rent in Advance can help repair or establish a good credit history. When you pay your bills every month, you are responsible for finances and can be trusted with more severe responsibilities later (like getting a car loan or even buying a house).