Rent that has been pre-paid but hasn’t yet been earned is shown as an unearned rent revenue obligation on a company’s balance sheet. This can happen if a tenant pays rent for a month or year in advance but the rental period has not yet begun. At the conclusion of each reporting period, accountants must make adjustments to the unearned rent revenue account in order to appropriately reflect the company’s financial condition. This is the procedure.
You must first determine how much rent has been collected throughout the reporting period in order to correct unearned rent revenue. You can calculate this by multiplying the number of months or days left in the rental period by the number of days remaining in the rental period, then dividing the result by the total amount of unearned rent money. For instance, the amount of money that has been earned would be $6,000 if a tenant paid $12,000 in rent for a one-year lease but only six months have gone.
You must debit the unearned rent revenue account and credit the rental revenue account for the amount of earned rent after calculating it. This will boost revenue on the income statement and decrease the liability on the balance sheet. At the conclusion of each reporting period, such as each month or quarter, this adjustment should be done.
At the conclusion of the reporting period, you might additionally need to close the rental revenue account in addition to reducing unearned rent revenue. Transferring the remaining balance from the rental revenue account to the retained earnings account is the usual way to accomplish this. The rental revenue account will be reset to $0 for the following reporting period.
An understatement of revenue and an overstatement of liabilities may emerge from a company’s failure to account for accumulated revenues. Financial statements may be erroneous as a result and may misrepresent the company’s financial situation. To make sure the financial accounts are accurate, accountants should constantly evaluate and make adjustments for accrued revenues.
On the cash flow statement, rent is normally listed under operating activities. Rent is a direct cost of doing business for the company and is therefore seen as an operating expense. Rent payments are included in the outflows under operating operations on the cash flow statement, which lists a company’s financial inflows and outflows for a reporting period.
Net operating income, or NOI, is not the same as cash flow. Both financial measures are significant for a company, but they measure distinct things. While NOI reflects the income earned from the company’s main business operations less operational expenses, cash flow monitors the actual cash inflows and outflows for a company throughout a reporting period. While cash flow does, NOI does not account for non-operating costs or the consequences of financing operations.