Deferred and accrued rent are somewhat related in that they both have to do with some element of the rent and its payment to the lessor, but they differ when it comes to when that payment is made, and how much it is.

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What is Deferred Rent?

Deferred rent occurs when there is a difference between payment amounts and the straight-line expense for a lease. When this difference occurs, there may be an increase or decrease to the deferred rent account throughout the life of the lease. When a lease has a free rent period or rent escalation, the changes to the deferred rent amount on a monthly basis may change.

Is Deferred Rent Always Recorded as a Liability, and How Is It "Delayed" or Deferred to Later Periods?

Under ASC 842, deferred rent is incorporated into the ROU asset and is no longer a separate Balance Sheet account. The straight-line lease expense will reduce the ROU Asset over the lease term or useful life of the asset based on lease classification.

Whether deferred rent is a liability or an asset depends on how different the straight-line rent amount is from the monthly payment amount.

What is Accrued Rent?

Accrued rent is the amount of money owed by a lessee, or the amount not yet collected by the lessor for their lease agreement. If rent is paid and collected on time, then accrued rent should not exist in a lease. If the rent deadline passes and a lessee has not yet paid their rent, they should still account for the expense by recording a debit to lease expense and a credit to accrued rent. Generally, accrued rent is not recorded as a separate account under ASC 842.

What is the Distinction Between Accrued Rent and Deferred Rent?

Accrued rent and deferred rent both refer to certain differences in the rent payment process. Accrued rent is a difference in the timing of lease payments, whereas deferred rent represents a difference in the amount of payment versus the straight-line rent calculation. In the former, the lessee’s payment is made later than the due date, and in the latter, the lessee makes their payments on time.

In What Situations Does Accrued Rent Typically Arise for Companies?

Accrued rent isn’t too common, as most lessors set their payment deadline before the beginning of a period, and the lessee is usually aware of the date. If accrued rent does happen, it usually means the lessee does not have enough liquid cash to pay the lessor before the deadline.

Can Accrued Rent Be Charged for Any Type of Asset, and is it Limited to Specific Assets?

Accrued rent can occur with any lease for any type of asset. The only criteria for accrued rent to occur is that a lessee does not pay the agreed-upon rent amount by the lessor’s payment deadline; however, under ASC 842, accrued rent generally does not exist. As soon as that deadline has passed, the money owed to the lessor becomes accrued rent.

Why is Accrued Rent No Longer Recognized As a Separate Line Item Under ASC 842?

Accrued rent is no longer recognized as a separate line item under ASC 842 because the timing of lease payments are recorded as a part of the lease calculations. The expense through the life of the lease is recorded on a straight-line basis and any payments made late will remain as open Accounts Payable. At the transition to ASC 842, the ROU asset is calculated as the lease liability and is adjusted accordingly to account for reconciling items, one of which is accrued rent.

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