How to Calculate Deferred Rent Expense

By Motley Fool Staff – Updated Apr 29, 2025 at 10:32 PM

Key Points

Deferred rent expense adjusts for uneven payments across a lease term.
Monthly financials use a straight-line rent expense, averaging total lease payments.
Use of deferred rent accounts balances financial statements, complying with GAAP.

Generally accepted accounting principles dictate that a business's rent expense should be shown on a business's financial statements as a consistent amount from month to month. In accounting parlance, that's called a "straight line" method.

That's all well and good when the lease is consistent over time, but many times, a lease may require the monthly payment to increase with inflation over time. Other times, a lessor may offer a rent holiday -- a "first month free" type of incentive. For accountants, dealing with these odd payment structures requires the use of an account called deferred rent expense.

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Pen in hand, signing a rental agreement. — Image source: Getty Images.

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	Rent Paid	Rent Expense	Deferred Rent	Cumulative Deferred Rent
January	$1,000	$1,250	$250	$250
February	$1,000	$1,250	$250	$500
March	$1,000	$1,250	$250	$750
April	$1,000	$1,250	$250	$1,000
May	$1,000	$1,250	$250	$1,250
June	$1,000	$1,250	$250	$1,500
July	$1,500	$1,250	($250)	$1,250
August	$1,500	$1,250	($250)	$1,000
September	$1,500	$1,250	($250)	$750
October	$1,500	$1,250	($250)	$500
November	$1,500	$1,250	($250)	$250
December	$1,500	$1,250	($250)	$0

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The monthly rent expense does not change over the entire term of the lease. Accounting rules say that it must remain constant, or straight line, at $1,250 each month. The rise and fall of the deferred rent account ensures that the company captures the actual cash being paid on the financial statements while staying in line with this accounting rule.

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