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Rent expense is the amount of money that is paid for occupying the space of a business or company. This expense is generally paid on a monthly basis, but there are times when it could be paid quarterly or yearly or on any other terms. Rent is a common expenditure for almost all businesses unless they own their property, and it is also one of the major expenses of any business or company. Rent is not tax deductible but is considered as an expense that will work to offset the income of the business.
A rent expense can either be classified as an administrative cost or a production cost depending on the use for the space for which the rent is being paid. If the space is being used specifically to manufacture and produce the product that the business sells, then it would be a production cost. This is because the cost of the rent should be calculated into the cost to make the product. For all other reasons, rent expense is considered an administrative cost. This means that it is considered to be part of the expenses that are necessary to perform the everyday business operations of the company.
If the monthly rent is for a building where portions are used for administration and the other portion is for manufacturing, then the rent expense must be split among the two areas. Since a business or corporation will pay their rent regularly in one lump sum, the cost per square foot is then usually calculated if this rent expense needs to be divided between different parts of the business. This will allow you to properly split the cost between administrative and production costs. In both cases the rent is still an expense used to offset profits.
Rent expense is an expense on the company’s income statement and should be calculated as an actual expense for the month in which it is being paid. It should not be confused with prepaid rent which is considered to be an asset to the company. A payment of rent will show up as a debit on the balance sheet and any credit or reduction to rent will show up as a credit on the accounting statement. Since rent is such a large percentage of a company’s business expenses, it is vital for it to be calculated and recorded correctly on all of the business’ financial statements. This will ensure that they are showing the most accurate picture of the business’ expenses and profit margin.