What is the difference between cash rent and straight-line rent?
A difference would arise if the cash rent is not exactly the same for each month across the lease term. Differences could result from lease incentives/inducements, or there could be a slight increase in rent expense each year to account for inflation. However, to calculate straight-line rent expense, you simply add up total cash rent paid and divide by the lease term in months.
For example, if rent is $50,000 total for a 5 year lease and the first year is free, then you would pay the $50,000 over 4 years at $12,500 per month. However, under U.S. GAAP, you would spread that $50,000 evenly over 5 years, which would make rent expense $10,000 per month.
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How to calculate straight-line rent expense?
If a company signs a 5-year lease, cash rent that is paid to the landlord often fluctuates each year. Under U.S. GAAP, rent in a company’s financial statements should be recorded on a straight-line basis. To calculate monthly rent expense on a straight-line basis, you must first calculate the total cash paid for rent over […]
What is a lease inducement or lease incentive?
A lease incentive, which is also commonly referred to as a lease inducement, is when the landlord (lessor) offers a deal to the lessee to sign the lease. Common examples include free rent for 3, 6, or 12 months, or you could see reduced rent for the first year if the lease term is multiple […]