When an operating lease has rent leveling, the normal journal entry transaction for a rent payment shows a debit to rent expense for the full leveled amount, a credit to cash, and a debit or credit to deferred rent liability, depending on whether the cash is less or more (respectively) than the current level rent expense. If this option is selected, an extra line is created in the journal entries report, titled "deferred rent expense"; the credit to cash is matched by a debit to operating rent expense, and the additional rent expense due to leveling is labeled "deferred rent expense" and matched to the deferred rent liability.
In addition, the Income Statement/Balance Sheet Compact report shows in the "Level Operating Rent Accrual" column just the deferred rent expense (the difference between the cash and level rent), rather than the entire level rent.
This option has no effect for ASC 842/IFRS 16 reporting.
Example
An operating lease has rent of $1000/month for 5 years, then $1500/month for 5 years. If this option is unchecked, the journal entry report for a month in the first five years shows:
Operating rent expense 1250
Deferred rent liability 250
Cash operating rent payment 1000
If this option is checked, the journal entry report shows:
Operating rent expense 1000
Deferred rent expense 250
Deferred rent liability 250
Cash operating rent payment 1000