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Aadil
AadilCurious
In: 1. Financial Accounting > Miscellaneous

Can you explain rent outstanding in accounting equation?

Can you explain rent outstanding in accounting equation?
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    1 Answer

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    1. AbhishekBatabyal Curious Pursuing CA, BCOM (HONS)
      2021-09-14T07:50:05+00:00Added an answer on September 14, 2021 at 7:50 am
      This answer was edited.

      Before answering your question directly, let’s first understand the two terms, ‘Rent Outstanding’ and ‘Accounting Equation’.

      Accounting Equation

      Accounting Equation depicts the relationship between the following items of a business:

      • Assets,
      • Liabilities and
      • Owner’s Equity ( Capital )

      It is a simple formula that implies that the total assets of a business are always equal to the sum of its liabilities and Owner’s Equity (Capital).

      ASSETS = LIABILITIES + CAPITAL   OR   A = L + E

      It is also known as the balance sheet equation.

      This equation always holds good due to the double-entry system of accounting i.e. every event has a dual effect on items of the balance sheet.

      Outstanding Rent

      We know rent is an expense for a business and rent outstanding means that rent is due, not paid which implies it is a liability which the business has to settle.

      Hence Rent Outstanding is subtracted from the capital balance and added to liabilities.

      Let’s take an example to see how rent outstanding affects the accounting equation. Suppose a business has the following figures:

      Assets – Rs: 3,00,000

      Capital – Rs: 2,00,000

      Liabilities – Rs: 1,00,000

      Assets = Liabilities + Capital

      3,00,000 = 1,00,000 + 2,00,000

      Now if Rent outstanding of Rs: 20,000 arises, this will happen:-

      Assets – Rs: 3,00,000

      Capital – Rs: 2,00,000 – Rs: 20,000 = Rs: 2,80,000

      Liabilities – Rs: 1,00,000 + Rs: 20,000 = Rs: 1,20,000

      Assets = Liabilities + Capital

      3,00,000 = 1,20,000 + 2,80,000.

      Hence, when rent outstanding arises, it increases the liability and decreases the Capital by the same amount. Therefore both the sides tally and the accounting equations holds good.

      Rent Outstanding is shown on the liabilities side of the balance sheet. Also, the rent outstanding of the current year is shown in the debit side profit and loss account and we know the balance of the P/L account if profit, is added to Capital and in case of loss it is subtracted from Capital. Hence, the rent outstanding is subtracted from the capital.

      I hope my answer was useful to you.

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