Journal entry for rent deposit paid in advance

Introduction

In business, we may need to pay the rent deposit in advance in order to rent some property, such as the office building from the landlord, for our operation. In this case, we need to make the journal entry for the rent deposit paid in advance in order to account for the outflow of cash from the business that we may or may not receive back after stopping renting the property.

In normal circumstances, we usually receive back the rent deposit that we have paid after we stop renting the property. After all, the rent deposit is usually for security purposes, so that we do not breach the rent agreement.

And of course, sometimes, the rent deposit will be non-refundable for the purpose that it will be used to offset in the last month or last months of the rent payment. In this case, we will not receive our rent deposit back but we do not need to make the payment of the last month or last months of rent either.

Journal entry for rent deposit paid in advance

We can make the journal entry for the rent deposit paid in advance by debiting the rent deposit account and crediting the cash account.

In this journal entry, the rent deposit account is an asset account on the balance sheet, in which its normal balance is on the debit side.

And as mentioned, the rent deposit is usually refunded back to us when we stop renting the property. Hence, later, when we receive back our rent deposit money after we stop renting the property, we can make the journal entry by reversing the rent deposit as below:

This journal entry is made to remove the amount of rent deposit from the balance sheet when we receive our deposit money back.

Example for rent deposit paid in advance

For example, on December 31, we have paid a $5,000 rent deposit in advance to the landlord in order to rent the office space for our business operation. This $5,000 will be refunded back to us when we stop renting this office space.

In this case, we can make the journal entry for the $5,000 rent deposit paid in advance by debiting this amount to the rent deposit account and crediting the same amount to the cash account as below:

Later, when we stop rent the property and receive this $5,000 rent deposit money back, we can make the journal entry to clear the deposit account as below:

Of course, this journal entry is assuming that there is no breach of the rent agreement such as stopping renting the property before the end of the rent agreement. If there is a breach of the rent agreement, we may not receive the rent deposit back at all.

Non-refundable rent deposit

Sometimes, the rent deposit that we have paid in advance is a non-refundable rent deposit. This rent deposit is usually used to net off with the last month or last months of rent payment.

In other words, as a tenant, we will not pay the last month of the rent, for we can use the rent deposit to offset our rent payment for the last month.

In this case, the journal entry for rent deposit paid in advance will be the same as debiting the rent deposit account and crediting the cash account.

(Of course, we may use the term refundable and non-refundable to distinguish between the two if we have many types of deposits in our accounting records.)

Later, in the last month of renting the property, we can make the journal entry to offset the deposit money as below:

In this journal entry, there is no cash account as we do not receive our rent deposit back. However, we do not make the cash payment for the last month of the rent either as it is offset with the rent deposit that we have made in advance.

For example, assuming the $5,000 rent deposit that we paid in advance in the example above is a non-refundable deposit. And this $5,000 rent deposit will be used to offset the last month of the rent payment. (also assuming that the rent fee is $5,000 per month.)

If that is the case, the journal entry for the $5,000 rent deposit paid in advance will be the same as below:

However, the journal entry to clear the rent deposit account when we stop renting the property will be changed to be as below instead:

Note:

It is usually to note that, in some jurisdictions, if the refundable rent deposit is significant or material to financial statements as a whole, it will need to be recorded as a financial instrument in which more complicated accounting procedures will be required for recognition and measurement. For example, the amount recorded on the balance sheet may need to be discounted and the effective interest rate may need to be used for subsequent measurements.