Sunday, June 7, 2020

Journal Entry For Outstanding Rent - With Detailed Example

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Journal entry for outstanding Rent
journal entry for outstanding rent

In this article, we will understand the journal entry of outstanding Rent. Before understanding about journal entry of outstanding rent first we will understand about journal entry

What is Journal Entry?

Journal entry is the primary step to record any transaction. When we record any transaction on the basis of source documents first step we opt to record the journal entry. Journal entry can be categorized into 3 accounts:- 

1) Real Account  2) Nominal Account  3) Personal Account.

Journal Entry for Outstanding Rent

1. Why we need to enter journal entry of outstanding rent

Sometimes the situation comes in front of us that we are paying rent for the march month, in the month of April. But as we know that accounts are closed on 31st March of every year. Hence for arriving at true and correct financial statements of the previous year, we have to record expenses of march month in that particular month even though we are paying in the month of April of next financial year. By this treatment, we ensure that our financial statement reflects the correct figure of each and every item.

We can understand whole journal entry by given below:

Date Particulars Dr./Cr. Amount
31/03/XXXX Rent A/c  Dr. XXX
  To Outstanding Rent A/c Cr. XXX
(Being Outstanding Rent Recorded)
10/04/XXXX Outstanding Rent A/c Dr. XXX
   To Cash/Bank A/c Cr. XXX
(Being Rent paid)

Outstanding rent journal entry
Outstanding rent journal entry

By this treatment, we booked rent expenses in the month of March even though payment made in the month of April. That means expenses booked in the month of March.

2. Understand the Nature of every Account

Account Nature of Account Dr./Cr Particular
Rent A/c Nominal Account Dr. Debit the Expenses or Loss
Outstanding Rent A/c Personal Account Cr. Credit the Giver
Cash/ Bank A/c Real Account Cr. Debit what comes In

  • Rent A/c Rent A/c is a Nominal A/c. Nominal Account known as:

"Debit the Expenses or Loss  
Credit the Receipt of Income"
Since we debited Rent A/c hence under Nominal A/c it would be treated as expenses according to rule above stated.

Treatment in Profit and Loss A/c: It will be debited under expenses head.

  • Outstanding Rent:  O/s Rent is fallen under Personal A/c. It is also known as  Representative Personal Account. Representative Personal Account means an account which is indirectly representing a person or group of persons. Since O/s Rent is not in the name of any person but represents outstanding Rent to a Person, Hence O/S Rent considered as Personal A/c.

"Debit the Receiver
Credit the Giver"

Above we debited and credited O/s Rent A/c, it means the person to whom O/s Rent represents is liable to receive Amount towards Rent in the 1st journal entry, and in the second journal entry, O/s Rent is debited It means the payment made to that person. 

Treatment in Balance sheet: O/s Rent will be showing under Current Liability of the Balance Sheet(Year-end).

  • Cash/Bank A/c: Cash/Bank A/c is a Real A/c.

"Debit what comes in
Credit what goes out"

In the above journal entry we credited Cash/Bank A/c it means cash is going from us. 

Treatment in Balance Sheet: Cash will be reduced in the year of payment.

Examples of Outstanding Rent

Example

Suppose Monthly rent payable by Pankaj to Jio is Rs.25000, which is payable by the 7th of next month.

Solution:

Journal Entry of Outstanding Rent

Date Particular Dr/Cr Amount
31/03/2020 Rent A/c Dr. Dr 25000
 To Outstanding Rent A/c Cr. 25000
(Being Rent payable recorded)
07/04/2020 Outstanding Rent A/c Dr. 25000
 To Cash/Bank A/c Cr 25000
(Being Rent Paid)

Treatment of the above Entry in the Financial Statement at year-end.

Once we entered journal entry of outstanding Rent then we have to post it in our financial statement.

Financial Statement Account Treatment
Income Statement Rent A/c Treat under Profit and Loss account as expenses incurred.
Balance Sheet Outstanding Rent A/c Show under the head of " Current Liability".
journal entry of outstanding rent, journal entry of outstanding expenses, journal entry of outstanding, outstanding rent, journal entry for outstanding rent, outstanding expenses journal entry

Written by - Pankaj Kumar
 

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