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How to Account for Prepaid Rent
Learn how to accept and account for short-term and long-term prepaid rent.
Written by Samuel
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If your tenant decides to prepay their rent, these will be considered liabilities on your balance sheet until they are used or withheld for charges and they become revenue. To record the payment for a lease deposit correctly, the charge on the lease will be to a liability account rather than a revenue account.
Accepting Prepaid Rent While Creating a New Lease
You can accept prepaid rent while creating a New Lease and that’s done in Step 4 of the Lease Creation process. Check out the article for Adding a New Lease for a refresher.
Navigate to Leasing and choose either Active Leases or Draft Leases. You can also create new leases from the Leases tabs of your properties and units. Click + New Lease button to begin.
In the Overview, select the Property and Unit along with the Lease Terms. Click Next to continue.
Select the Tenants for the lease. Click Next to continue.
In the Rent tab, enter your Rent Charges as normal along with the Frequency and Amount. Click Next to continue.
The Security Deposit tab is where things change a bit and you’ll be adding an extra step to your process. Usually in this step, you’ll be adding a Security Deposit along with any other Deposits you are collecting.
Click Yes here for Security Deposits. If you are collecting a regular Security Deposit, click Show Advanced Options. Enter an amount for this.
Next, click + Add another charge. In the dropdown menu for “What is this for?”, you would select Prepaid Rent from Liability.
Enter the full amount the tenant paid for prepaid rent.
Click Next to continue.
Continue on with the Late Fees and then the Rental Status to Finish.
Now if we go and check the Active Leases and click on that lease, you’ll now see that there’s an OutStanding Balance of $X.XX amount that you entered for prepaid rent.
Click the Transactions tab.
Click Recieve Payment and in the new popup, receive the prepaid payment and click Save.
If you go to the Rent tab now, you'll see that there is now a Security Deposit being held along with Prepaid Rent being held.
The Outstanding Balance will now show up as $0.00. The next step in the process will depend on whether you want to apply the prepaid rent as a recurring credit or if you want to apply it on a month-to-month basis, manually.
Accepting Prepaid Rent on an Existing Lease
You can also enter prepaid rent on an existing lease if your tenant decides to prepay their rent at any time during their lease. This is actually a really simple process that requires you to post a charge and receive payment. Learn more about Posting a Charge on a Lease.
On the left-hand menu, select Leasing and then click Active Leases.
Click the lease you will be working on from the list.
On the Overview page of the lease, select the Transaction tab.
On the Transaction page, click the Post Charge button.
From here, you’ll want to enter the relevant information. The most important information to enter here is the Account (Liability > Prepaid Rent), an optional Description, and the Amount of the prepaid rent.
Click Save.
You’ll now be back at the Transaction page. Next, you’ll want to click on the Receive Payment button.
From the Receive Payment, enter the Amount and Payment method.
Toggle off Automatic Pay and manually apply the amount received to the prepaid rent charge.
Click Save to finish.
How to Automatically Apply the Prepaid Rent to Upcoming Rent Charges
If your tenant has prepaid several months' worth of rent, for instance, the whole year, you can set up a recurring credit each month that will be put towards that month’s rent. Here’s how that’s done. Learn more about Adding a Recurring Credit to a Lease.
On the left-hand menu, select Leasing and then click Active Leases.
Click the lease you will be working on from the list.
On the Overview page of the lease, select the Rent tab.
Click the Recurring Credit button.
From the Recurring Credit popup, uncheck the option for “repeat until the end of the lease.”
You’ll want to set the Start Date and End Date for the recurring credit, as well as the Frequency.
For Account, select Prepaid Rent under Liability. For the Amount, enter the amount that each month’s rent will be.
Click Save to complete the process.
What this will do it create a credit each month (similar to withholding deposit) and apply that to the rent charge, while deducting the amount from the Prepaid Rent deposit.
How to Apply a One-time Payment of the Prepaid Rent to the Current Month’s Rent Charge
For each rental payment period, the system will automatically post a charge for rent at whatever the rent is. What you’ll want to do now is manually Withhold Deposit every month to pay for the rent charge. Learn more about Withholding a Lease Deposit.
On the left-hand menu, select Leasing and then click Active Leases.
Click the lease you will be working on from the list.
On the Overview page of the lease, select the Deposits tab.
Click the Withhold Deposit button in the upper-right corner.
In the Withhold Deposit screen, enter a Due Date, and then under your Prepaid Rent deposit account, enter the rent amount under Amount to Withhold.
Click Save to complete the process.
Prepaid Rent is a liability account. That means that when you charge and accept payment to a Prepaid Rent account, it will appear in the Deposits tab on the lease. You are holding these funds for future use to pay rent charges each month when they are posted. This way, the correct amount of rent is collected each month as revenue.
Prepaid Rent will show up as liabilities being held in reports.
For Prepaid Rent to be turned from a liability to a revenue account, the rent charge needs to be posted first. This way, withholding the deposit or applying a credit will go towards that rent charge.
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