Accounting for expenses paid from rental income

Aaron, 

It looks like you're not booking the gross rental income, you're probably just booking the deposits (the net).

If that's the case, I would make a Journal Entry, and I would debit all these expenses that you mentioned and credit the rental income account.

This way, you'll be recognizing in your books the gross rental income (by the difference) and all those rental operating expenses that were made. 

Thanks so much for the reply, this is helpful.  The only issue I am running into with this, is that the credits and debits won't match because we owe the rental company a balance of $40.03 after everything.  The rental income for the month was $260, but with repairs and service charges, the expenses ended up being $300.03.  Being that the debits and credits don't match for the journal entry, how would I adjust?

Glad it helped!

It looks like those operating expenses were paid by some other entity/person. As a result, I would book those $40.03 as a liability (it's a loan payable to XX). This way, you will reflect that $40.03 needs to be reimbursed to that entity or person (XX) who covered those expenses. As a result, your journal entry will balance. 

Emiliano.

Thanks again for your informative response!  The balance of $40.03 that we owe the rental company - they are just going to roll that into next month and they will deduct it from our rental income since we will have a lot more income and won't end up with any balance owed.  In that case, should I just wait and enter all of the information mentioned above with that statement since there will not be any balance owed at that point? or what is the best way? Thank you!!

You could do it that way but I always tell our clients to match revenue with COG in the same month, if possible. What I'm saying is... I would suggest you still book it the way I recommended so that your rental operating costs hit last month's P&L. 

Next month, when those $40.03 get deducted from the rent, you could debit the liability and credit the rental income account. This way, your liability is removed from the books and your P&L will show the gross rental income.

@Aaronc5150 

Just a slight correction on what @AccountingLabs suggested.  When you create the journal entry next month, you don't want to debit the liability and credit income. You want to debit the liability and credit cash because the rental company will reduce your payout by the $40.03 you owe them.  If you credit income, you will be overstating your income and your deposit will be over by $40.03.  

I thought the same thing but this is where my brain is going... when they receive the cash next month, they'll receive it for less than the total gross rental income. As a result, they'll be debiting the bank account and crediting the rental income account (but it'll be short by $40.03). Then, they make the AJE debiting the liability and crediting rental income to book the gross rental income.

If he credits cash in that AJE, his reconciliation will be affected because he won't receive 100% of the rental income funds. The rental company is planning on deducting it directly before the rental income payout.

That's what I understood from Aaron's statement. Maybe I overlooked something else he shared with us.

@AccountingLabs 

I appreciate your thoughts and I can see where you're coming from.  However, the $40.03 is a loss, not income.  If you use an AJE and move it from the liability to income, that is not correct because the $40.03 was never and should never be income.  That $40.03 is a liability owed to the rental company and will be paid with cash from the next month's payout.  Hence, debit liability, and credit cash.  Income and expenses for last month were properly recorded.  And, income and expenses for next month will be correct.  The only adjustment needed next month is to close the liability to cash.  You make a good point though that, technically, it is not a credit to cash - it is a $40.03 reduction of the debit to cash to offset the liability debit.  Crediting cash works but it makes the reconciliation weird (as you mentioned) if you don't know the credit offsets the shorted deposit.  I thought going into that much detail may be too much for the OP.   

I would definitely agree with it as long as the rental company pays out a 100% of the revenue. 

However, if the rental company is deducting the $40.03 from the rental income, then, income will be booked short by $40.03. That's why, I was suggesting that if that's the case, the pay off of the liability is with revenue. Thus, the credit would be the missing rental income. As a result, income will be booked correctly in that month for the full amount.

@AccountingLabs 

"However, if the rental company is deducting the $40.03 from the rental income, then, income will be booked short by $40.03. That's why, I was suggesting that if that's the case, the pay off of the liability is with revenue. Thus, the credit would be the missing rental income. As a result, income will be booked correctly in that month for the full amount."

With all due respect, that's not correct.  Next month's income is unrelated and last month's income was booked correctly.  Think about it this way: if the OP sent a check to cover the $40, the journal entry would be debit liability, credit cash.  That's all that's happening here except the rental company is withholding the $40 from the payout.  Let's assume that next month, the OP has $1,000 in revenue and $500 in expenses.  The rental company needs to withhold $40 from the payout.  Here's the OP's journal entry: 

As you can see, cash has been credited (debit reduced) by $40.  There is no need to account for the $40 as it relates to income.  Last month's income and expenses were booked correctly and the journal entry above books next month's income and expenses correctly.   

I really appreciate all the detail and discussion on this! However, I think I got lost a bit as to what exactly I should do, lol. N

@Aaronc5150 

OK, back on track here...

To book last month's activity, create a journal entry:

Next month, the journal entry will look like this (assuming you have enough revenue to pay the $40.03 you owe the rental company and receive a payout):

If you receive a payout from the rental company the following month, the journal entry will look like this:

@Aaronc5150 

EDIT - the liability amount for last month should be $40.03, not $40.00.

VERY helpful, thank you again! Do I just need to create a short term liability account to record the $40.03 due?

@Aaronc5150 

Correct.  You could also use Accounts Payable instead of a new liability account on the journal entries. That just requires making the rental company a vendor and then going to ‘Pay bills’ after recording next month’s payout to apply the credit to the bill. That way, it will be recorded under the vendor’s account.  Either way will work.