Can you explain rent outstanding in accounting equation?
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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:
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.