Journal Entry for Deferred Rent

Overview

Sometimes, when the company signs a lease agreement to rent the facility for operation from another company or individual, it may receive free rent for one or more months at the beginning of the rent period. In this case, the company needs to determine and make the journal entry for deferred rent at the first period of free rent with the rent expense even there is no payment made yet.

Deferred rent occurs when the company is given one or more months of free rent at the beginning of the lease agreement. In this case, there won’t be any payment for the first rent period (i.e. no cash transaction), but there will still be the rent expense as the company has used the rental facility. Hence, the deferred rent will be included on the credit side of the journal entry as a liability.

Journal entry for deferred rent

The company can make the journal entry for deferred rent by debiting the rent expense account and crediting the deferred rent account.

Account	Debit	Credit
Rent expense	000
Deferred rent		000

The deferred rent account is a liability account on the balance sheet in which its normal balance is on the credit side.

Its amount in this journal entry can be calculated by using the total rent payment in the lease agreement dividing by the payment period. For example, if the lease agreement is 12 months with a payment of $1,000 each month and the company is given a one-month free rent on the first month, then the deferred rent is $916.67 ($1,000 x 11 / 12).

At the later periods of the rent, the company needs to debit the deferred rent account together with rent expense when it makes the rent payment as below:

Account	Debit	Credit
Rent expense	000
Deferred rent	000
Cash		000

The debit amount of deferred rent in this journal entry is the difference between cash payment for rent and rent expense. With this journal entry at each period-end adjusting entry, the deferred rent account will become zero at the end of the rent period.

Deferred rent example

For example, on January 1, the company ABC signs a twelve-month lease agreement to rent an office building for its operation. The company ABC is given a one-month free rent at the beginning of the lease agreement.

The rent period starts from January 1 to December 31 and the company ABC needs to pay a rental fee of $5,000 at the end of each month starting from Feb onward until the end of the lease agreement.

As the company ABC is given a one-month free rent in the first month, it can make the journal entry for deferred rent on January 31 as below:

Account	Debit	Credit
Rent expense	4,583.33
Deferred rent		4,583.33

The amount of $4,583.33 is calculated by using the $5,000 to multiply with 11 (months) to get a total payment ($55,000) in the lease agreement and then divide it by 12 (months).

$5,000 x 11 / 12 = $4,583.33

Later, from the second month onward when the company ABC makes a payment of $5,000 at the end of each month, it can make the journal entry with the debit of $416.67 ($5,000 – $4,583.33) to the deferred rent account as below:

Account	Debit	Credit
Rent expense	4,583.33
Deferred rent	416.67
Cash		5,000

After this journal entry, the balance of deferred rent is $4,166.67. This balance will become zero at the end of the rent period as in the table below:

Month	Rent payment	Rent expense	Deferred rent	Balance of deferred rent
1	–	4,583.33	4,583.33	4,583.33
2	5,000.00	4,583.33	(416.67)	4,166.67
3	5,000.00	4,583.33	(416.67)	3,750.00
4	5,000.00	4,583.33	(416.67)	3,333.33
5	5,000.00	4,583.33	(416.67)	2,916.67
6	5,000.00	4,583.33	(416.67)	2,500.00
7	5,000.00	4,583.33	(416.67)	2,083.33
8	5,000.00	4,583.33	(416.67)	1,666.67
9	5,000.00	4,583.33	(416.67)	1,250.00
10	5,000.00	4,583.33	(416.67)	833.33
11	5,000.00	4,583.33	(416.67)	416.67
12	5,000.00	4,583.33	(416.67)	(0.00)
Total	55,000.00	55,000.00	(0.00)