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A deferred rent liability is money a company owes, but hasn't paid, the landlord at the reporting date. Think of this as rent debt, the kind that the business must settle to be in good terms with the property owner. The concept of rent deferral draws on multi-year contractual agreements that businesses sign with landlords, generally with the promise to pay rent periodically, such as every six months or on a quarterly basis. The deferred rent liability account also may arise if a corporate tenant has a temporary financial problem and simply cannot pay rent.
A balance sheet provides a glimpse into resources a company uses to stand tall competitively, along with outlets it relies on to fund its activities. Finance people call the former items "assets" and refer to the latter items as "liabilities" or "equity," depending on the funding source. If the business borrows to finance its operations, it records liabilities -- also known as debts, obligations or financial commitments. If top leadership gets the operating money from investors, the organization
posts the proceeds as equity.
To record rent deferral, a corporate bookkeeper credits the deferred rent liability account and debits the rent expense account. Deferred rent liability is a short-term debt account on the balance sheet because a landlord most likely expects a remittance from the tenant within one year. If a lease contract allows the lessee -- another term for tenant -- to accrue rent over a period that exceeds 12 months, the deferred rent liability becomes a long-term debt.
When a corporate tenant settles a rent obligation, a bookkeeper debits the deferred liability account and credits the cash account. When accounting people talk about crediting cash, they mean reducing company money. Rent expense goes on a statement of profit and loss, whereas the cash account follows the deferred liability account in a balance sheet, also known as a statement of financial condition or report on financial position. However, cash is a short-term asset, meaning an organization intends to use it within 12 months for purposes as varied as settling operating commitments, paying employees and taxes.