Lease Accounting

Lease Accounting

Lease is basically is giving the right of use to the lessee by the lesser for lease rental. Lease can be broadly classified into operating and finance lease. Some important qualifying conditions of finance lease are listed below

1.    Finance lease asset is used for major portion of useful life.

2.    Finance lease lessee has the option to buy the asset at the end of lease term.

3.    Specialized asset (customer specific asset) is always finance lease.

Operating Lease Accounting

In operating lease the lessee simple record the lease rental as expense by the following entry. The lease rental is debited and cash is credited.

Date	Particulars	Dr.	Cr.
	Lease Rental	$ xxx
	Cash		$ xxx

Finance Lease Accounting

In finance lease the risk and reward are transferred to the lessee and therefore the lessee record the asset in the books of account. In finance lease there are three types of recording

a)    Asset recognition.

b)   Depreciation.

c)    Interest on lease.

In first year the lease asset shall be recognized by debiting the asset and crediting the financial lease liability.

Date	Particulars	Dr.	Cr.
	Asset	$ xxx
	Finance lease liability		$ xxx

Each year the depreciation expenses will be recorded by debiting the depreciation expense and crediting the accumulated depreciation.

Date	Particulars	Dr.	Cr.
	Depreciation	$ xxx
	Accumulated Depreciation		$ xxx

Each year the interest expense shall be recorded in the books of account by debiting the interest expenses and crediting the cash or Finance lease liability.

Date	Particulars	Dr.	Cr.
	Interest	$ xxx
	Finance Lease Liability		$ xxx

Each year the finance lease payment is recorded by debiting the finance lease liability and crediting the cash.

Date	Particulars	Dr.	Cr.
	Finance Lease Liability	$ xxx
	Cash		$ xxx