Q: LaBouche Corporation owns a warehouse. On November 1, it rented storage space to a lessee (tenant) for 3 months for a total cash payment of $600 received in advance.
Journalize the entry for this transaction.
A: The journal entry here would be:
Debit: Bank/Cash..................$600 Credit: Rent received in advance (liability).............$600
The income received in advance is a liability.
Here's an example of how to think with this. Let's say your friend gave you $100 to buy something for her from overseas in Europe. But you're only going overseas in 3 month's time. For those 3 months before you actually go to Europe and buy the product and give it to your friend, it's kind of like you owe her the money. Because you haven't fulfilled your side of the transaction yet... Make sense?
This kind of transaction is generally known as prepaid income or income received in advance.