Is Rent Accounts Payable?

One of the key areas that arise often when it comes to accounting in small businesses is the issue of expense classification. Such common questions include for example, whether rent should be classified as an accounts payable. As a response to such questions, we’ll make sure to give a clear answer to whether rent belongs to accounts payable in this article.

What is Accounts Payable?

AP is the liability account that tracks the amount of money that a business has to pay its suppliers for goods or services bought on credit. In other words, it is all the short-term obligations a business has to its suppliers whenever it uses its goods or services before paying for them in cash.

Common examples of accounts payable include:

- Accounts payable which represent amounts owed to suppliers or vendors for goods and services received.
- Outstanding liabilities a company has incurred with other service providers
- This includes goods bought by the company that had not been paid for including inventory, materials, office supplies etc.

In other words, AP is a part of operating expenses which reflects the short-term accounts payable, which means obligations for payments to be made in the short-term timeframe, mostly within the current year. As a result, accounts payable are classified under current liabilities in a company’s balance sheet.

Is Rent an Accounts Payable Expense That Should be Recorded in the General Ledger?
However, similar to contract services a business uses, rent is often not categorized under usual accounts payable. This is so because rent is not seen more as an operating expenditure or an operating expense but rather as a non-operating expense or an expense that has already been incurred in the long run.

While definitions can vary, rent payments are typically classified as part of a company's:

- Operating expenses
- Facility/occupancy expenses
- General administrative expenses

Nonetheless, rent is usually not included in the accounts payable since it is not necessarily an expense that is directly associated with any inventory, materials, or services that have been procured to realize sales revenues.

Besides, rent payments are commonly made on a more extended or predetermined period covered by a legal document called a lease. This is in contrast with accounts payable which are more routine or variable obligations directly related to the vendor invoices and bills received by a business.

Recording the rent payments is not quite a complex process, but it has to be done in the right way and with the appropriate steps followed strictly as explained below.
If rent is not considered as an accounts payable then how it is properly entered in the accounts of the business?

Here are a few tips:

- Accost rent with other overhead operating expenses in financial reporting. It also means that rent can be deducted from the gross revenue when arriving at the gross income that is subject to tax.

- Assist with the coordination of rent payments through automatic and regular payment cycles according to the legal lease agreements. This transforms rent into something closer to a fixed periodic payment requirement rather than an AP line item flexibility.

- It is good practice to keep a sub-account on the general ledger for all payments beyond the normal rent charged each month. This includes deposits given, the last month's rent, etc.

- If due to nonpayment of rent, reclassify this amount as AP current on the balance sheet. This way, any rent accrued at any given period is treated as a short-term receivable until the tenant clears the arrears.

Accounting for Rent Deposits

One more issue that has to be mentioned is regarding which accounts a rent security deposit should be included in – accounts payable. In most occasions, any payments made earlier to cover the cost of rentals or leasing would not be regarded as AP.

Since deposits are a credit that can be used at a later date to recoup or settle the final balances, they can be considered neither as liability, nor operating expense. And so, rent deposits should be classified as non-trade receivables rather than Accounts receivable. Common ways to record advance rent payments include: Common ways to record advance rent payments include:

- Recording deposits as a distinct account, placed together with the current or noncurrent assets based on the term of the lease.
- Recording deposits in a separate GL account for instance Security Deposits or Prepaid Rent.
- Thus, using the offsetting deposits, keeps the full rental liability on the company’s balance sheet.

The Bottom Line

When paying for business rent every month or recording the same, it will not be considered as an accounts payable. Rent is seen as a fixed and necessary expense linked to a lease agreement that the business cannot avoid.

However, rent should be recorded as a running cost that is common to the operation of the business. The actual rent payments would be made from the company checking account This means that actual payments are made with real money that is available in the bank. Following that, any unpaid rent or rent that is in arrears would then be recorded as a receivable on the balance sheet.

Well, I hope that I shed some light on the frequently asked question of whether business rent expense should be debited to the accounts payable or not. If you have additional questions on accounting or financial reporting, please do not hesitate to ask.

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