In particular, during these difficult times, a question we see coming up is how should accrued income from rent be treated? This article will look at the accounting entries and discuss some of the income tax consequences.
What is Accrued Rent Income?
We have a few articles going into accrued revenue in a broader sense, particularly our article here. However, in this article, we focus on accrued rent income – obviously from the landlord’s point of view. This area is relevant to my wife and me as we have a small flat we rent out.
Accrued income more generally is the bringing to account, or recognition, of income you have earned but have not yet received. In a typical “cash accounting” system, you recognise revenue when received, which usually means when you earn it, as the two events coincide.
Rental Example – Cash v Accrued Income
Under the cash basis of accounting, when you receive your monthly rental payment from your tenants, you would make the following accounting entry in your business accounting records:
| Date | Account Name | Debit | Credit |
|---|---|---|---|
| 10 May | Bank | $750 | |
| | Rental Revenue | | $750 |
But under accrual accounting, we recognise the movement of economic benefits and obligations rather than when cash moves. Economic benefits are in assets (things you own) and economic obligations are liabilities (things you owe). Over the last 20, the conceptual accounting frameworks have moved away from an income statement to a balance sheet focus. But don’t worry about that for the moment.
So under an accrual system, if the tenants paid the rent when it was due, the journal entry would be the same; we would record the increase in cash at the bank and rental revenue. But what happens if you don’t receive the rent when it’s due? Under an accrual system, you initially make the following entry:
| Date | Account Name | Debit | Credit |
|---|---|---|---|
| 10 May | Rental Debtors | $750 | |
| | Rental Revenue | | $750 |
So we would record the revenue due, but we would record the increase in assets through debtors (money the tenant owes) rather than cash at the bank (as you haven’t received it yet). When your tenants pay, you would then make the following accounting entry:
| Date | Account Name | Debit | Credit |
|---|---|---|---|
| 10 May | Cash at Bank | $750 | |
| | Rental Debtors | | $750 |
What About Income Tax?
Income tax, of course, varies across tax jurisdictions, but western countries tend to follow a similar approach. Generally, business taxpayers have the choice of submitting tax records on a cash basis or accrual basis. And often, these are based on certain income thresholds. So, for example, because our rental business is tiny, we use the cash basis for our income tax reporting. We report to the tax office the income we have received and expenses we have paid.
The cash system is more straightforward, and in the end, it’s just timing differences. And by this, I mean that the income and expenses eventually all get recorded; it’s just when they are under a cash or accrual system.
Conclusion
In this simple example, we have ignored debtor default and how you would treat that. If this is something you would like written about, please let us know. We hope you have found this article helpful and better understand how to account for income from accrued rent.