Is Unearned Rent A Liability

Upon moving into an office, warehouse or flat, a new tenant would typically pay the landlord the first and last months' hire. Nevertheless, only the first month's rent is deemed for as rent revenue in the electric current period, and the residue is recorded by the landlord every bit unearned rent on the balance canvas until it is ultimately earned during the final month of the lease, when it is reclassified into revenue on the income statement.

The Matching Principle

A new tenant who paid the offset and last months' rent would accept an asset consisting of prepaid hire on his books until it is "spent" on the last month of the lease. Conversely, the landlord would have received payment for the two months, but one month'southward sum is withal unearned rent because it is for a period in the future; today it represents an unfulfilled obligation, hence a liability is recorded by the landlord for this amount.

Deferred Revenue

This landlord has accounted for the receipt of greenbacks from the tenant for last month's rent as unearned hire. Notwithstanding, a unlike style to view the same transaction is by accounting for it every bit deferred revenue. Classifying a payment as deferred revenue instead of unearned rent tin help avert misunderstanding its purpose, and serve as a reminder that it represents the accelerate receipt of revenue which must wait to exist recognized until is properly earned, and not a liability in the traditional sense.

Periodical Entries

Cash is the nugget that is recorded upon receipt of funds, and since assets must equal liabilities plus equity, the other side of the periodical entry must be a liability business relationship. That being said, unearned hire does not remain a liability forever. When the last month of the lease is over, for case, the unearned rent credit balance is debited, and the rental acquirement business relationship is credited, substantially moving it from the balance sheet to the income statement.

Prepaid Hire

Unearned hire, or deferred revenue as it may be called, is an business relationship for landlords just, not tenants. Tenants' balance sheets will frequently have a prepaid hire asset account, and rarely an unearned rent liability account. Only if the business is both a landlord AND a tenant (in the case of a property manager that leases its office infinite, for instance) would its books properly have both prepaid rent and unearned rent accounts.