If a renter prepays you rent, the way you account for it depends on if you are accounting on a cash basis or on an accrual basis. Most real estate investors do their accounting on a cash basis.
Accounting for prepaid rent on a cash basis
If you’re accounting on a cash basis, income is booked when the cash is received. So you’d book the rent payment into “Rental Income -> Rents” on the date the payment hits your bank account (regardless of when the rent is actually due).
Example:
Monthly rent of $1200. Renter pays you $1200 rent due May 1 on April 10 (instead of May 1). Book the $1200 as “Rental Income -> Rents” on April 10.
April will show rental income of +$1200 from that May rent invoice.
May won’t show any rental income from that May rent invoice.
Accounting for prepaid rent on an accrual basis
If you’re accounting on an accrual basis, you’ll accrue prepaid rents into the “Prepaid Rent” current liability account when the rent is received, and then journal it into income in the month it was due.
In the same example as above, monthly rent of $1200, Renter pays $1200 rent due May 1 on April 10.
April 10: Book the $1200 deposit in your bank account to “Prepaid Rent”. Your balance sheet will now show an increase of $1200 in Current Assets -> Bank - Checking, and an increase of $1200 in Current Liabilities -> Prepaid Rent. Your P&L won’t show anything.
May 1: Create a journal entry:
- Credit Rental Income -> Rents $1200
- Debit Prepaid Rent $1200
Now, your prepaid rent account will decrease by $1200, and your P&L will show $1200 of rental income.