Here are Operating Lease Accounting Journal Entries Example. Operating leases are lease agreements where the lessee does not Consider the risks and rewards of ownership of the leased asset. Instead, the lessee treats lease payments as rental expenses.
Example Scenario
Let’s assume Company A enters into an operating lease for office equipment with a monthly lease payment of ₹10,000, starting on 01-07-2024.
Journal Entry to Record Monthly Lease Payment
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-07-2024 | Lease/Rent Expense | 10,000 | Recording lease payment for the month | |
| 01-07-2024 | To Cash/Bank | 10,000 | Payment of monthly lease |
Explanation:
- Lease/Rent Expense Account Debit: Increases the expense account, reflecting the cost of leasing the equipment.
- To Cash/Bank Account Credit: Decreases the cash or bank account, reflecting the outflow of funds for the lease payment.
Accrual Basis Accounting
If the payment is made at the end of the month, the lease expense is accrued at the beginning of the month, and the payment is recorded when it is made.
Accruing Lease Expense:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-07-2024 | Lease/Rent Expense | 10,000 | Accruing lease expense for the month | |
| 01-07-2024 | To Lease/Rent Payable | 10,000 | Accrued lease expense |
Explanation:
- Lease/Rent Expense Account Debit: Increases the expense account, reflecting the cost of leasing the equipment.
- To Lease/Rent Payable Account Credit: Increases the liability account, indicating the amount owed for the lease.
Payment of Lease Expense:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-07-2024 | Lease/Rent Payable | 10,000 | Clearing the accrued lease expense | |
| 31-07-2024 | To Cash/Bank | 10,000 | Payment of monthly lease |
Explanation:
- Lease/Rent Payable Account Debit: Decreases the liability account, clearing the accrued expense.
- To Cash/Bank Account Credit: Decreases the cash or bank account, reflecting the outflow of funds for the lease payment.
Conclusion
Operating leases are treated as rental expenses, and lease payments are recorded as expenses in the period they are incurred. Properly recording these payments ensures accurate financial reporting and compliance with accounting standards.