Over the last few weeks we have been focusing on accounting tutorials around balance day adjustments, in particular accrued revenue. As part of that we looked at unbilled rental income. And it’s from this we are today looking more broadly at the journal entry for rental income.
The short answer if you are in a hurry is debit debtors or bank (depending on whether the tenants have paid) and credit income. If you would like a fuller explanation, then please read on.
What is Rental Income?
Rental income is a normal credit account and is reflected on the profit or loss statement (statement of financial performance). Debits are not normally applied to income accounts as the “netting-off” tends to mask what is going on and can make corrections later on more difficult to track.
The only question in dealing with rental income is what is the corresponding debit side to the journal entry. As we know under double-entry accounting, the accounting equation must always be in balance. The debit accounts to the left of the equals sign (“=”) must always be in balance with the credit accounts on the right. Another way of saying this the accounts were money is spent or consumed must equal the accounts from where money comes from.
So in our case the debit can only be applied to one of three different asset accounts, being: bank (or cash), debtors or accrued rent (see our article here on accrued rental revenue if you aren’t sure about this one).
Journal Entry Example for Rental Income
So let’s now work through a simple example to show the debits and credits involved. Let’s assume you own a single rental property, as my wife and I do, and the rent is due on the 4th of each month. We’ll work through the three different types of entries you can make.
Rental Income Received
In case number one we are dealing with the receipt of cash (deposit into your bank account) from the tenant on the 4th of the month:
The debit to bank increases the current assets balance, while the credit to rental income increases the total income of the rental business for the reporting period. Under a cash accounting system, as we use for tax reporting purposes here, this is the normal entry made each month. We only recognise the rental income when we actually receive the money.
Rental Income Owed
Under an accrual accounting system you might use a debtor account. For example, if the tenant has asked for some extra time to pay in a particular month or is just late. In this case you have earned the rental income (economic benefits) and are due these from the tenant. The journal entry would be:
|4 June||Rental Debtor||$500|||
With this entry the credit entry still increases the total revenue for the business, while the debit still increases the current asset balance – but this time through debtors rather than the bank account. If you were operating a cash system you wouldn’t make this entry because no money has been received.
Accrued Rental Income
In the last case we are dealing with period-end reporting, normally year-end (often referred to as balance day adjustments). Let’s assume your tax year ends March 31, you account for your rental business on an accrual basis, and as above rent is due on the 4th of each month. For year-end reporting you would make the following entry:
|31 March||Accrued Rent||$435|||
So how did we come up with the figure of $435? Because the rental due period and end-of-year don’t align perfectly (shame really), so we have to apportion the revenue between the reporting periods. So we have to make a balance-day adjustment for accrued rental income. The calculation we made was:
March 5th to April 4th = 30 days
March 5th to March 31st = 26 days
26 days / 30 days = .87 (rounded 2dp)
$500 due per month x 0.87 = £435
So the debit to accrued revenue increases current assets (as it does in the above two scenarios), while the credit does the same thing as before with increasing revenue.
We hope you have found this tutorial useful, one of many we now have in our growing accounting tutorial section. As always we welcome your comments and feedback. You can use the comments section below, use our contact us page or raise a question on the “ask a question” section.