What is Rent Expense?
Rent expense is an account that lists the cost of occupying rental property during a reporting period. This expense is one of the larger expenses reported by most organizations, after the cost of goods sold and compensation expense. However, as a greater proportion of employees work from home, this expense may trend downward over time.
Rent Expense Under the Cash Basis of Accounting
Under the cash basis of accounting, the amount of rent expense reported in a period is the amount of cash paid during that period. Under the accrual basis of accounting, the amount of rent expense reported in a period represents the amount of usage of the rental property during the period, irrespective of the amount of cash actually paid during the period.
Rent Expense Under the Accrual Basis of Accounting
Under the accrual basis of accounting, if rent is paid in advance (which is frequently the case), it is initially recorded as an asset in the prepaid expenses account, and is then recognized as an expense in the period in which the business occupies the space.
Presentation of Rent Expense
Rent expense is typically allocated between the selling and administrative, and production portions of the income statement. Alternatively, the entire amount may be charged to the selling and administration part of the income statement.
