Journal Entry for Rental Property
Rental Property is the company’s fixed assets that rent to the customer for additional income.
The company may own many fixed assets which suppose to be used in their business operation. However, some of them are idle, so they decide to rent those properties to the customer for additional revenue.
Some companies purchase fixed assets with the intention of renting to others. Their business operation is to rent the property to the customers. The rental property includes a house, building, warehouse, and so on.
The company has to record these properties as part of the investment property. It refers to the land and building that company purchases for the purpose of renting or capital gain.
The same as normally fixed assets, the company has to depreciate the assets. It will reduce the company assets on balance sheet to depreciation expenses on income statement. The allocation is based on the useful life of assets.
These are the company property that rent to the customer for rental income. It is the main business activity for the company. The company owns these properties and rents them to the customers.
Journal Entry for Rental Property
When the company operates the rental property, there are several transactions that the owners have to be aware of.
Received Security Deposit
The company that owns the rental property will require the customer to pay for the security deposit. It is the money that use to ensure that the property remains in good condition after the rental contract is finished.
It is not the revenue for the property owner, they have to record it as the liability on the balance sheet.
The journal entry is debiting cash received and credit deposit account (liability account).
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Customer Deposit | $$$ |
Based on the term and conditions, the deposit may be used to settle the rental fee in the last rental period. If so, the company has to revere the customer deposit (liability account) to revenue on the last period.
| Account | Debit | Credit |
|---|---|---|
| Customer Deposit | $$$ | |
| Rental Income | $$$ |
If the security is kept and returned to the customer at the end of the contract. The company will have to inspect the property at the end of the contract and if nothing is wrong, the company will reverse the cashback. The journal entry is debiting customer deposits and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Customer Deposit | $$$ | |
| Cash | $$$ |
Rental fee received in advance
Sometimes the customer paid the rental fee in advance, they paid before consuming the rental from company. So we cannot record the revenue immediately, the company should record revenue after giving service to the customer.
The journal entry is debiting cash and credit unearned revenue.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Unearned Revenue | $$$ |
The company needs to allocate the unearned revenue to rental revenue based on the rental service provided to the customer.
Receive Rental Fee
At the month-end, company issues an invoice to customer for the monthly rental fee. They expect to collect payment after issuing an invoice.
The company issue invoice to the customer after the monthly rental is finished. The company record rental income and accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $$$ | |
| Rental Income | $$$ |
If the customers do not make payment on the due date, the accounts receivable will remain on the balance sheet. Some company may have penalties over late payments, based on the company policy.
When the customer makes a payment, the company will record cash received and reverse the accounts receivable.
The journal entry is debiting cash and credit accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Accounts Receivable | $$$ |
Example
Company ABC owns many rental properties which include houses and apartments.
On 01 May, Mr. A start to rent an apartment from ABC. He paid the security deposit of $ 5,000 which will be used for the last 5 months of the contract.
On the same date, Mr. A paid 3 months rental fee in advance which equals $ 3,000.
Please prepare a journal entry for these transactions.
When receiving a rental deposit from a customer, ABC records cash received and liability on the balance sheet. The journal entry is debiting cash of $ 5,000 and credit customer deposit of $ 5,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Customer Deposit | 5,000 |
the customer deposit will sit on the company balance sheet under the liability section. It will be reversed to rental income for the last 5 months.
When the company receives rental fee in advance, they will record cash received and unearned revenue which is the liability as well.
The journal entry is debiting cash $ 3,000 and credit unearned revenue $ 3,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 3,000 | |
| Unearned Revenue | 3,000 |