Understanding Straight-line Rent Standards
The Financial Accounting Standards Board (FASB) controls the accounting standards in the United States to ensure that financial statements are in accordance with Generally Accepted Accounting Principles (GAAP). Ruling 13 from that board, states that the revenue from rent (recurring billings) must be recognized evenly (as a straight line) over the life of the lease. The difference between the straight-line rent that the system calculates and the actual rent that you bill the tenant (or pay the landlord) must be reflected in the general ledger.
These examples illustrate the actual rent amount for three years and the effect of Straight-line Rent.
Example: Actual Rent
This table illustrates the actual rent for the lease term January 1, 2007 – December 31, 2009:
Time Period |
Actual Rent |
|---|---|
January 1, 2007 to December 31, 2007 |
15,000 |
January 1, 2008 to December 31, 2008 |
20,000 |
January 1, 2009 to December 31, 2009 |
25,000 |
Total |
60,000 |
Example: Effect of Straight-line Rent
This table illustrates the effect of Straight-line rent for the lease term January 1, 2007 – December 31, 2008:
Time Period |
Actual Rent |
Straight-Line Rent |
Accrual/Deferral* |
|---|---|---|---|
January 1, 2007 to December 31, 2007 |
15,000 |
20,000 |
5,000 |
January 1, 2008 to December 31, 2008 |
20,000 |
20,000 |
0 |
January 1, 2009 to December 31, 2009 |
25,000 |
20,000 |
(5,000) |
*Straight-line rent minus actual rent
To calculate the effect of straight-line rent, the system adds the rent amounts for the entire lease term, and then divides the sum by the number of months in the lease term. Then the system subtracts the actual rent from the straight-line rent to determine the amount of the accrual or deferral that must be recorded in the general ledger. GAAP states that accruals and deferrals must be recognized in the financial statements.
A positive difference is an accrual. In the example, you received 15,000 in cash the first year, but you earned 20,000 based on Straight-line rent processing. Therefore, the system generates an accrual entry to debit the account for accrued/deferred rental income and credit the account for rental revenue.
A negative difference is a deferral. In the example, you received 25,000 in cash the third year, but you earned 20,000 based on Straight-line rent processing. Therefore, the system generates a deferral entry to debit the account for rent revenue and credit the account for accrued/deferred rental income.