State BPA Fundamental Accounting Practice Exam

How should Rent Expense be recorded in financial statements?

1. Credit on the Balance Sheet

2. Debit on the Income Statement

3. Credit on the Income Statement

4. Debit on the Balance Sheet

The correct answer is: Debit on the Income Statement

Rent Expense should be recorded as a debit on the Income Statement. When rent is incurred, it represents a cost that the business has to pay for occupying space used for operations. This cost is categorized as an expense, which reduces the overall income for the period. In financial accounting, expenses are typically recorded with a debit entry, which increases the total expenses reflected on the Income Statement. By debiting the Rent Expense, it aligns with the accounting principle of recognizing expenses in the period they are incurred, thus matching them against revenues earned during that same period. This approach ensures that the financial statements accurately reflect the profitability and operational efficiency of the business. Other options do not align with the principles of accrual accounting and the proper treatment of expenses. For instance, recording rent expense as a credit would signal an increase in income or reduction in liability, which does not accurately represent the nature of this transaction. Similarly, including it on the Balance Sheet does not appropriately capture the performance of the business during a specific period—it should instead impact the Income Statement.