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Is rent received in advance included in taxable income?


1 Answer

  1. This answer was edited.

    What is Rent Received in Advance?

    It’s an amount received by the landlord from his tenant before such tenant has availed the benefits from the property taken on rent. It’s an income received in advance.

    Income received in advance refers to the amount received by a person or an entity before rendering services or transfer of title to goods.

    For Example,

    A landlord may have the policy to charge the last month’s rent in advance for his convenience to cover himself from loss of income on the expiry of the lease term. A lot of landlords across the globe follow this policy.

    Whether it is Taxable?

    The answer to this question is that it depends. It depends on the accounting policy an entity or a person follows.

    If a person follows the Accrual System of Accounting then the rent received in advance shall be treated as a liability in the year of receipt and it will be taxable in the year of accrual.

    The image shown below is the perfect example of the same:

    Advance rent when accrual system is followed

    However, If a person follows Cash System of Accounting then such rent received shall be treated as an income in the year of receipt and it would be taxable in the year of receipt itself.

    The image shown below explains the same:

    Rent in Advance treatment in Profit and Loss Account when one follows cash system of accounting.

    The accounting treatment in each of the case shall be:

    In the Accrual System of Accounting

    Cash A/c                                           Dr. Asset Debit the increase in an asset.
    To Rent Received in Advance A/c Liability Credit the increase in liability.

    In the above journal entry, it is reflected that rent will not be recorded in the income statement i.e it will be taxable in the year of accrual and so it shall be the taxable income in the next accounting period.

     In Cash System of Accounting

    Cash A/c                                            Dr. Asset Debit the increase in an asset.
    To Advance Rent Income A/c Income Credit the increase in income.

    In this case, it is reflected from the above journal entry since the cash system is followed the rent is recorded as an income and since it will be reflected in an income statement it is a taxable income in the year of receipt.

    Aastha Mehta

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