Accrued Rent Receivable

Accrued rent receivable is the amount of rent a landlord has earned, because a tenant has occupied the property, but has not yet received or invoiced by the balance sheet date. It is an asset, usually classified with current assets when it relates to rent due within a year, and it is the landlord's counterpart to the tenant's accrued rent liability.

The general idea of accrued rent on both sides of a lease is covered under accrued rent expense and income. This entry focuses on the receivable: how it is recorded, why real estate companies often carry large "straight-line rent receivable" balances under ASC 842, and how collectibility affects it.

A landlord who has let a flat for a month has provided something of value, whether or not the tenant has paid yet. The accrued rent receivable is the landlord's note to itself saying "this much has been earned and is still to come". It is similar to a bill the landlord has not sent yet.

In the language of accrual accounting, the rent is recognized because it has been earned, not because it has been received. When the tenant pays, the note is crossed out. If the tenant never pays, the note was worth less than it said, and the landlord has to reduce it, just as a shop writes off a customer who disappears without paying.

A landlord lets a warehouse for $6,000 a month, payable quarterly in arrears. At the end of its first month, the landlord records:

• Debit Accrued Rent Receivable $6,000.
• Credit Rental Revenue $6,000.

After the second month the receivable is $12,000. When the tenant pays $18,000 at the end of the quarter, the landlord debits Cash $18,000, credits Accrued Rent Receivable $12,000 and credits Rental Revenue $6,000 for the third month. The pattern is the same as for any accrued revenue and follows the revenue recognition principle.

For an operating lease, a lessor under ASC 842 generally recognizes rental income on a straight-line basis over the lease term. If a lease has a rent-free period or fixed annual increases, income in the early years exceeds the cash billed, and the difference builds up as a straight-line or deferred rent receivable, which is a form of accrued rent receivable.

Suppose a five-year lease has no rent in year 1 and $50,000 a year in years 2 to 5, a total of $200,000. Straight-line income is $40,000 a year. In year 1 the landlord debits Accrued Rent Receivable and credits Rental Revenue for $40,000, though nothing is billed. In each later year it bills $50,000, recognizes $40,000 of revenue and reduces the receivable by $10,000, so the balance is zero at the end of the lease. Because much of this receivable is collected more than a year ahead, it is often presented as noncurrent, and each real estate investment trust typically discloses it separately. The landlord's tax return may treat the same rent differently, since tax rules for rent timing do not always follow book straight-lining, which can create temporary differences.

An accrued rent receivable is only worth recording if the landlord expects to collect it. Under ASC 842, if collection of substantially all lease payments is no longer probable, the lessor limits income to the cash actually received and reverses previously accrued receivables against revenue. Separately, specific billed amounts that a solvent tenant disputes may need an allowance, measured with the same judgment used for any doubtful debtor, as with ordinary accounts receivable.

Analysts adjust for straight-line rent when measuring property cash flow. Because accrued rent increases revenue without bringing in cash, it is deducted from net income in the operating section of the statement of cash flows, and many real estate companies remove it from cash-based performance measures. The underlying lease agreement and the tenant's creditworthiness determine how much of the receivable should be trusted.

• Financial Accounting Standards Board