Final answer:
Unearned rent revenue is a liability on a company's balance sheet that represents prepaid rent. The company recognizes this revenue monthly over the lease term, adjusting its accounts accordingly. An advance payment of $6,000 for a 12-month lease equates to recognizing $500 of rent revenue each month.
Step-by-step explanation:
Unearned Rent Revenue Explanation
When a company collects rent in advance, this transaction is recorded as unearned rent revenue on its balance sheet. This represents a liability because the service (the use of the rental property) has not yet been provided. The advance payment received on November 1 is for a 12-month period, meaning the occupancy and rental service begin on this date. Accounting principles require that the rent revenue be earned over the duration of the lease. Each month, a portion of the unearned rent revenue will be recognized as earned rent revenue. This process is known as deferral and is essential for matching revenue with the period in which it's earned.
For example, if the company received $6,000 for 12 months, this amounts to $500 per month ($6,000 / 12 months). Thus, at the end of each month, they would debit unearned rent revenue and credit rent revenue by $500, reflecting the earning of that month's rent.