How to determine whether you have a deferred rent asset or liability. How to create month end adjusting journal entry.

1. Period-End Close
Series
Deferred Rent Asset/Liability
Bill Hanna, CPA
Date prepared: September 22, 2015

2. 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.

3. Step 1
Determine Monthly Rent
Expense
Monthly Rent
Expense =
Total Rent Payments
Over Lease Term
Number of Month

4. Step 2
Determine whether an Asset or
Liability
Deferred Rent Asset
Rent Expense – Rent Payment = Negative
Deferred Rent Liability
Rent Expense – Rent Payment = Positive

5. Example
Einstein LLC enters a lease agreement for an office space
The Terms
Lease term 2 years
Lease 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)

6. Here is the table to break it down
Year Month Rent Rent Monthly Cumulative
Expense Payment Deferred Rent Deferred Rent
1 1 10,500 10,000 500 500
1 2 10,500 10,000 500 1,000
1 3 10,500 10,000 500 1,500
1 4 10,500 10,000 500 2,000
1 5 10,500 10,000 500 2,500
1 6 10,500 10,000 500 3,000
1 7 10,500 10,000 500 3,500
1 8 10,500 10,000 500 4,000
1 9 10,500 10,000 500 4,500
1 10 10,500 10,000 500 5,000
1 11 10,500 10,000 500 5,500
1 12 10,500 10,000 500 6,000
2 13 10,500 11,000 -500 5,500
2 14 10,500 11,000 -500 5,000
2 15 10,500 11,000 -500 4,500
2 16 10,500 11,000 -500 4,000
2 17 10,500 11,000 -500 3,500
2 18 10,500 11,000 -500 3,000
2 19 10,500 11,000 -500 2,500
2 20 10,500 11,000 -500 2,000
2 21 10,500 11,000 -500 1,500
2 22 10,500 11,000 -500 1,000
2 23 10,500 11,000 -500 500
2 24 10,500 11,000 -500-
252,000 252,000-

7. The Monthly Journal Entries
During Year One:
Accounts Payable enters this:
Dr. Rent Expense $10,000
CR. A/P $10,000
Month-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 $11,000
Month-end adjusting entry (to decrease expense and liability):
Dr. Def. Rent Liab. $500
CR. Rent Expense $500

8. Thank You!