How to account for rent cheque?

[Michael DeBusk]

On Sun, Mar 1, 2015 at 6:54 PM, geo909 <geo909.fora at gmail.com> wrote:

> The manual says that the rent that I pay should be accounted as an expense.
> However, the way that I do it is that I give to my landlord a cheque with
> the rent amount, each first day of the month. This seems to me like being a
> liability, which disappears when my landlord cashes the cheque.

A common misunderstanding.

I like to think of liabilities as borrowed money. Your credit cards,
mortgage, car loans, and the like are liabilities. (I also include
under-withheld taxes, because I DO owe the money... it's as if I
borrowed it.)

Expenses, though, are (effectively) paid as they are encountered. You
do not, in fact, owe the rent to the landlord until the day you pay
it. (You do say you pay it on the first of the month.) Utilities
payments, gasoline, tolls, parking fees, interest on loans, groceries,
restaurant checks, and the like are expenses.

To confuse things just a hair, it is possible to have, say, a rent
liability. If you fail to pay your rent within the grace period, then
you HAVE (effectively) borrowed money from the landlord, and you may
want to account for it that way. (I wouldn't bother.)

> So, how should I account for it? If I create a Liabilities:Rent Payable
> account, and increase it by the rent amount every first of the month, from
> where should I transfer the money?

You know, you could do it that way. All it does is severely complicate
your record-keeping, but you could do it that way. Large businesses do
it like that. It's called "accrual basis" accounting. (When my
accounting teacher first described it, I thought, yes, 'a cruel' way
of doing it indeed.)

You would create Liabilities:Rent Payable and Expenses:Rent. On the
first of the month, you would credit Liabilities:Rent Payable and
debit Expenses:Rent. Then you would write the check, give it to your
landlord, credit Assets:Checking, and debit Liabilities:Rent Payable.

With "cash basis" accounting, which you will probably want to use for
your personal books, you would simply create an Expenses:Rent account,
forgetting about Liabilities:Rent Payable altogether. When you write
the rent check, you credit Assets:Checking and debit Expenses:Rent.

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