here is find out details wise with example lease accounting journal entries. Lease accounting involves recording transactions related to leasing assets. There are two main types of leases: operating leases and finance leases (or capital leases). The accounting treatment for each type of lease varies significantly.
Key Terms
- Lessee: The party that leases the asset.
- Lessor: The party that owns the asset and leases it to the lessee.
Lease Accounting for Lessee
1. Operating Lease
In an operating lease, the lessee does not assume the risks and rewards of ownership of the asset. Lease payments are treated as operating expenses.
Journal Entries for Operating Lease:
- Lease Payment Entry:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Lease Expense | Amount | Record lease payment | |
| DD-MM-YYYY | To Cash/Bank | Amount | Payment of lease |
Example: On 01-08-2023, a business makes a lease payment of ₹50,000.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-08-2023 | Lease Expense | 50,000 | Record lease payment | |
| 01-08-2023 | To Cash/Bank | 50,000 | Payment of lease |
2. Finance Lease
In a finance lease, the lessee assumes the risks and rewards of ownership of the asset. The lessee records the leased asset and a corresponding liability.
Journal Entries for Finance Lease:
- Initial Recognition of Lease Liability and Asset:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Right-of-Use Asset | Amount | Record leased asset | |
| DD-MM-YYYY | To Lease Liability | Amount | Lease obligation |
Example: On 01-07-2023, a business enters into a finance lease with a present value of lease payments totaling ₹500,000.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-07-2023 | Right-of-Use Asset | 500,000 | Record leased asset | |
| 01-07-2023 | To Lease Liability | 500,000 | Lease obligation |
- Lease Payment Entry (Interest and Principal):
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Interest Expense | Interest | Record interest portion of lease | |
| DD-MM-YYYY | Lease Liability | Principal | Reduce lease liability | |
| DD-MM-YYYY | To Cash/Bank | Total Payment | Payment of lease |
Example: On 01-08-2023, a lease payment of ₹60,000 is made, with ₹10,000 as interest and ₹50,000 as principal.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-08-2023 | Interest Expense | 10,000 | Record interest portion of lease | |
| 01-08-2023 | Lease Liability | 50,000 | Reduce lease liability | |
| 01-08-2023 | To Cash/Bank | 60,000 | Payment of lease |
Lease Accounting for Lessor
1. Operating Lease
In an operating lease, the lessor retains ownership of the asset and records lease income as it is earned.
Journal Entries for Operating Lease:
- Lease Payment Received:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Cash/Bank | Amount | Record lease payment received | |
| DD-MM-YYYY | To Lease Income | Amount | Lease income |
Example: On 01-08-2023, a lessor receives a lease payment of ₹50,000.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-08-2023 | Cash/Bank | 50,000 | Record lease payment received | |
| 01-08-2023 | To Lease Income | 50,000 | Lease income |
2. Finance Lease
In a finance lease, the lessor records a receivable for the present value of lease payments and derecognizes the leased asset.
Journal Entries for Finance Lease:
- Initial Recognition of Lease Receivable:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Lease Receivable | Amount | Record lease receivable | |
| DD-MM-YYYY | To Asset (e.g., Equipment) | Amount | Derecognize leased asset |
Example: On 01-07-2023, a lessor enters into a finance lease with a present value of lease payments totaling ₹500,000 for an equipment originally costing ₹400,000.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-07-2023 | Lease Receivable | 500,000 | Record lease receivable | |
| 01-07-2023 | To Equipment | 400,000 | Derecognize leased asset | |
| 01-07-2023 | To Gain on Lease | 100,000 | Recognize gain on lease |
- Lease Payment Received (Interest and Principal):
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Cash/Bank | Total Payment | Record lease payment received | |
| DD-MM-YYYY | To Interest Income | Interest | Record interest income | |
| DD-MM-YYYY | To Lease Receivable | Principal | Reduce lease receivable |
Example: On 01-08-2023, a lease payment of ₹60,000 is received, with ₹10,000 as interest and ₹50,000 as principal.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-08-2023 | Cash/Bank | 60,000 | Record lease payment received | |
| 01-08-2023 | To Interest Income | 10,000 | Record interest income | |
| 01-08-2023 | To Lease Receivable | 50,000 | Reduce lease receivable |
Conclusion
Accurate lease accounting is essential for maintaining reliable financial records and ensuring the financial statements reflect the true financial position of the business. By understanding how to create journal entries for different types of leases, both lessees and lessors can manage their leases effectively.