What is rent expense?

Definition

Rent expense is the occupancy cost of a leased room or building for this month. On the books, this is an Income Statement cost, not the cash that leaves when the landlord is paid.

A pilates studio books this month's studio lease here. Paying later settles what is owed; it does not create a second occupancy cost.

Accrual books record the month that used the space, even if the check is dated next week. Cash-basis books may wait until the payment leaves the bank.

This cost is the period's occupancy. It is not the security deposits held by the landlord, and it is not the build-out the studio capitalized.

Where it shows up

P&L: Located in operating expenses.

Balance Sheet: Related to prepaid rent or the lease liability still open.

Cash flow: Decreases when rent is paid, reported cash from operating activities decreases.

See also: Operating Expenses · Lease Liability · Fixed Costs

When you look at your Income Statement, this cost sits in the keep-the-doors-open block. Class fees sit above it as revenue.

When the figure is high, the studio is paying more for space, or a second room came online. When it is low, a credit, a free month, or a smaller suite brought the period down.

The Balance Sheet does not keep this period's occupancy cost after the close. Paid-ahead months sit in prepaid expenses; unpaid months sit in accounts payable or as a lease liability.

On the Statement of Cash Flows, the rent payment is the cash event. Cash from operating activities falls when the check or ACH leaves the bank.

Fixed costs stay roughly the same whether Tuesday's classes are full. This occupancy cost is usually one of those steady bills.

How it works

The studio uses the room for a month. That month's occupancy belongs on this line, even if cash has not moved.

If the landlord has billed and the check is still unwritten, the studio debits this cost and credits accounts payable. The space was already used.

If the studio paid three months in advance, the payment starts as prepaid expenses. Each month then moves one month out of that prepaid balance and onto this cost.

A long-term lease may also record a right-of-use asset and a lease liability. The period's occupancy cost still has to land on the Income Statement, whether as this line or as the related amortization and interest.

Stay with this month's occupancy when you read the line. A deposit the landlord will return is an asset, not this cost.

Leasehold improvements are capitalized upgrades to the rented room. Those costs spread over time as depreciation; they do not sit on this rent line.

Do not treat the payment as a new cost if the month was already recorded. The payment clears the payable; this cost was booked when the studio used the space.

After the month closes, this line is part of the period's profit story. Next month starts the count again from zero.

Example

Riverbend Pilates occupies a 1,200-square-foot studio. This month's lease is $4,000, and the landlord's bill is sitting unpaid.

The studio records:

Debit: Rent expense $4,000

Credit: Accounts payable $4,000

This cost hits the Income Statement, and accounts payable (a liability) goes up by $4,000. Cash has not moved.

Class revenue this month is $18,000. After the $4,000 occupancy cost, $14,000 is left to cover instructors, insurance, and everything else.

When the studio pays the landlord, it clears the $4,000 payable and cash falls. This cost stays at $4,000; only the payable and the bank account move.

If Riverbend had prepaid September and October in August, September's $4,000 would move out of prepaid expenses instead of through accounts payable. The Income Statement still shows $4,000 of this cost in September.

Common mix-ups

Rent expense is not the same as the rent check. The cost is the month that used the space; the check is the later settlement.

Rent expense is not the same as a security deposit. A deposit the landlord will return is an asset; this line is the period's occupancy cost.

Rent expense is not the same as the lease liability. The liability is the remaining obligation on the lease; this line is the cost that belongs to this period.

Related terms

• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Lease Liability: The recorded obligation for future lease payments.
• Right Of Use Asset: The asset recorded for the right to use leased property over the lease term.
• Fixed Costs: Costs that stay roughly the same regardless of sales volume.
• Leasehold Improvements: Capitalized upgrades made to a rented space.
• Security Deposits: Cash held by a landlord or vendor that will be returned later.
• Recurring Journal Entry: A standard entry set to repeat each period with the same accounts.
• Selling General And Administrative Expenses: The grouped overhead costs of selling, administration, and management.