Accrued rent liability is the amount a tenant owes for rent that has already been incurred, because the tenant has used the property, but that has not been paid by the balance sheet date. It is usually a current liability, sometimes shown in its own line and more often included within accrued expenses or other current liabilities.
The account is the balance sheet half of an accrual whose other half is rent expense. The general topic, including the landlord's matching receivable, is covered under accrued rent expense and income. This entry focuses on the liability itself: how it is created and cleared, and how the US lease standard, ASC 842, has narrowed the situations in which it appears.
Accrued rent liability in plain terms
A tenant who stays in a space for a month without paying has, in effect, run up a tab with the landlord. The accrued rent liability is the running total on that tab at the moment the books are closed. It is not a loan and carries no interest; it simply records that the tenant has had the benefit of the space and still owes for it.
The idea rests on the matching principle: the cost of using a space belongs in the same period as the sales and activity that the space supported, not in whichever month the payment happens to fall.
As soon as the rent is paid, the tab is cleared. If rent is always paid on the first of the month for the month ahead, a tab never builds up, and there is no accrued rent liability at all.
Journal entries
A tenant pays $4,000 a month in arrears, on the tenth of the following month. At its June 30 quarter end, June's rent is unpaid. The adjusting entry is:
- Debit Rent Expense $4,000.
- Credit Accrued Rent Liability, or Rent Payable, $4,000.
On July 10 the tenant pays, debiting Accrued Rent Liability $4,000 and crediting Cash $4,000. No expense is recorded in July for June's occupancy. The entry is a standard accrual-type adjusting entry and follows the same pattern as any accrued liability, such as wages or interest.
Effect of ASC 842 on lease accounting
Before ASC 842, many tenants with operating leases recorded rent on a straight-line basis and carried a "deferred rent" or "accrued rent" liability for the difference between straight-line expense and cash paid, which arose from free-rent periods and scheduled increases. Under ASC 842, issued by the Financial Accounting Standards Board, a tenant with a lease longer than twelve months instead recognizes a right-of-use asset and a lease liability measured at the present value of the remaining payments. The old straight-line difference is absorbed into the right-of-use asset, so that particular use of accrued rent liability has largely disappeared from balance sheets.
Accrued rent liability still arises in several situations:
- Short-term leases. A tenant may elect not to recognize leases of twelve months or less on the balance sheet, and simply accrues rent that is due but unpaid.
- Variable payments. Percentage rent based on sales, or common-area charges billed after the fact, are expensed as incurred and accrued until paid.
- Arrears in any lease. Rent that is contractually due but unpaid at period end is owed whatever the lease classification, although under ASC 842 it is usually presented as part of the lease liability or accounts payable rather than a separate account.
Presentation and analysis
Accrued rent liability is normally small and short-lived, since it reflects only a few weeks of occupancy. A balance that keeps growing may signal that the tenant is falling behind on rent, which a lender or auditor would want explained. Because the liability arises from an operating cost, changes in it are part of the working capital adjustments in the operating section of the statement of cash flows: an increase is added back to net income, because expense was recorded without cash being paid. The tenant's lease agreement determines when rent is due and therefore whether an accrual is needed at all.