When tenants pay rent in advance, it raises a common accounting question for landlords: What is prepaid rent on a balance sheet? Whether you manage one rental or multiple properties, understanding how to record and track prepaid rent is essential for maintaining accurate financial records and cash flow reporting.
In this guide, we’ll explain how prepaid rent works, how it affects income reporting, and how to handle it correctly on your balance sheet.
Prepaid rent refers to rent payments received before the rental period begins. For example, if a tenant pays January rent in December, that payment is considered prepaid rent.
Even though you've received the money, you haven’t technically earned it yet. You’ll earn it when January starts, and the tenant will officially be occupying the unit for that time.
Prepaid rent is recorded as a current asset, not income, when it's first received.
It only becomes rental income once the rent period arrives and the tenant has "used" the property.
Here’s how it works:
This method follows accrual basis accounting, which records income and expenses in the period they’re earned or incurred, regardless of when the money actually changes hands.
Let’s say you have a rental property where rent is due on the 1st of each month. The tenant pays $1,500 for February’s rent, but they send the payment on January 28.
Here’s how to record it:
January 28 (when payment is received):
February 1 (when rent is earned):
You’ve now recognized the payment as income in the correct month and updated your books accordingly.
When recorded correctly, prepaid rent shows up under “Current Assets” on your balance sheet. That’s because it's money you've received for a service (rental use) you haven’t yet provided.
Once the month arrives and the tenant officially occupies the property, the prepaid amount is removed from the asset section and posted as rental income.
This approach keeps your financial reporting aligned with reality. It shows not just the cash you have on hand but also the portion of that cash that still represents an unearned obligation.
Prepaid rent can make monthly income look uneven. Here’s why:
If a tenant pays rent in advance (for example, they pay both October and November rent in September), you’ll receive a large sum all at once. However, only part of that should count as income in September. The rest needs to be recorded in the following months as it becomes earned.
This process keeps your reported income aligned with each rental period, even if the payment came early.
On your cash flow statement, prepaid rent is reflected when cash is received, not when it's earned.
That means your cash flow increases when you receive the payment, even though your income statement stays flat until the rental period starts.
This timing difference is important to understand, especially if you use reports to make monthly financial decisions. You might see an income “dip” during months when no new rent is collected, even though the money came in earlier.
The IRS typically treats prepaid rent as taxable income in the year it's received, especially if you use cash-basis accounting (which many landlords do).
That means if your tenant pays January rent in December, it counts as 2024 income, even though it’s for January 2025. You don’t get to wait and report it next year. And you can’t report it again in January—it’s taxed once, at the time of receipt.
Important:
Talk to your tax advisor or property manager to make sure you're reporting income correctly.
Managing prepaid rent might sound simple, but keeping your financial records accurate month after month takes experience and attention to detail. At Real Property Associates, we help Seattle property owners:
Whether you're just starting with one property or managing a portfolio, our expert accounting support ensures that your rental income is recorded and reported correctly.
By understanding how to record prepaid rent properly, you’ll get a clearer picture of your rental income, stay compliant with tax rules, and keep your business running smoothly.
At Real Property Associates, we take the guesswork out of financial tracking for Seattle landlords. Our team understands how to handle prepaid rent, balance sheet entries, and cash flow reporting so that your finances stay accurate and compliant. Whether you're managing one property or many, we help you make sense of your numbers and maintain consistent income visibility month after month.
Let us help you simplify your property finances. Contact us today to learn how our professional property management services can support your success.