Unearned rent journal entry
Overview
Under the accrual basis of accounting, revenue should only be recognized when it is earned. Likewise, when the company receives the early cash payment for the rental service, it should record the cash received as unearned rent revenue in the journal entry.
The nature of unearned rent is a liability which the company owes to its client or customer in providing the rent. Likewise, recording the unearned rent as revenue will result of the overstatement of revenue on the income statement and the understatement of liabilities on the balance sheet.
Unearned rent journal entry
The company can make the unearned rent journal entry by debiting the cash account and crediting the unearned rent revenue account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Unearned rent revenue | 000 |
Unearned rent revenue is a liability account, in which its normal balance is on the credit side. Likewise, this journal entry is made to recognize that the cash received from the early payment of rent is not revenue but an unearned revenue.
Later, when the rental property or equipment is used for a period of time (e.g. one month), the company can recognize revenue for that period by transferring the amount in the unearned rent revenue account to the rent revenue account at the period end adjusting entry.
In this case, the company can make the journal entry with the debit of the unearned rent revenue account and the credit of the rent revenue account.
| Account | Debit | Credit |
|---|---|---|
| Unearned rent revenue | 000 | |
| Rent revenue | 000 |
Unearned rent example
For example, on December 29, 2020, the company ABC receives an early cash payment of $2,000 for the rental property it provides to the client. The payment is for the rental fee in January 2021.
In this case, the company ABC needs to record the $2,000 of cash received as an unearned rent revenue in the journal entry on December 29, 2020.
| Account | Debit | Credit |
|---|---|---|
| Cash | 2,000 | |
| Unearned rent revenue | 2,000 |
Later, on January 31, 2021, the company can transfer the $2,000 of unearned rent revenue to rent revenue as the revenue is earned in January 2021.
| Account | Debit | Credit |
|---|---|---|
| Unearned rent revenue | 2,000 | |
| Rent revenue | 2,000 |