Lease is the agreement between lessee and lessor. Lessor gives his asset to lessee for use. Lessee gives the money for using the asset of lessor. So, there are transactions which happen between the lessee and lessor. We can record all these transactions by writing journal entries. Both parties will record the journal entries.
Before learning all these journal entries, we have to understand the the kinds of lease because it affects the journal entries.
When there is the agreement which fulfills the following condition, will be the capital or finance lease.
a) Lessor will transfer the ownership at the end of the term of lease.
b) Purchasing bargaining.
c) 75% or more of total life will be the lease life. If total life of asset will be 6 and lease agreement is of 5 years, then it is more than 75% life of total lease and acceptable as capital lease.
d) 90% or more of fair value of asset will be the present value of asset for lease.
Operating lease means the lease in which asset is not transferred. Just asset is used for the rent payment. After the end of lease, ownership will be in the hand of lessor. During the time, all the risk relating to the asset will be of lessor.
We also should understand the the following meaning clearly.
1. Payment or Rent Payment
Payment is the amount which is given by lessee to lessor. In this, interest and principal amount.
2. Lease obligation or payable
It is the principal amount which a lessee will pay to lessor during the period of lease.
3. Interest
Interest is the income for lessor. It is the gain on the lease.
Journal Entries in the Books of Lessee
{A} When there is Capital Lease
1. For total amount of lease payable.
In the beginning of lease
Fixed Asset Account Debit
Lease Payable Account Credit
In the end of first year and subsequent years.
2. For transfer of Depreciation to Depreciation accumulated account
Depreciation account Debit
Accumulated Depreciation account Credit
In the end of first year and subsequent years.
3. For payment of lease obligation and interest.
( For example, rent payment is of $ 5000 ( lease obligation $ 4000 + $ 1000 )
Lease Payable Account Debit 4000
Interest Account Credit 1000
Bank Account Credit 5000
{B} When there is Operating Lease
In the end of the year and subsequent years.
Rent of Lease Account Debit 5000
Cash Account Credit 5000
Journal Entries in the Books of Lessor
{A} When there is Capital Lease
1. For total amount of lease receivables. It is just like credit sale of fixed asset.
In the beginning of lease
Lease Receivables Account Debit
Fixed Asset Account Credit
In the end of first year and subsequent years.
2. For Receiving the amount of lease.
( For example, rent received is of $ 5000 )
Lease Receivable Account Debit 5000
Bank Account Credit 5000
{B} When there is Operating Lease
In the end of the year and subsequent years.
Bank A Debit 5000
Lease Receivable Account Credit 5000
Example :
Before learning all these journal entries, we have to understand the the kinds of lease because it affects the journal entries.
1. Capital or Finance Lease
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When there is the agreement which fulfills the following condition, will be the capital or finance lease.
a) Lessor will transfer the ownership at the end of the term of lease.
b) Purchasing bargaining.
c) 75% or more of total life will be the lease life. If total life of asset will be 6 and lease agreement is of 5 years, then it is more than 75% life of total lease and acceptable as capital lease.
d) 90% or more of fair value of asset will be the present value of asset for lease.
2. Operating Lease |
Operating lease means the lease in which asset is not transferred. Just asset is used for the rent payment. After the end of lease, ownership will be in the hand of lessor. During the time, all the risk relating to the asset will be of lessor.
We also should understand the the following meaning clearly.
1. Payment or Rent Payment
Payment is the amount which is given by lessee to lessor. In this, interest and principal amount.
2. Lease obligation or payable
It is the principal amount which a lessee will pay to lessor during the period of lease.
3. Interest
Interest is the income for lessor. It is the gain on the lease.
Journal Entries in the Books of Lessee
{A} When there is Capital Lease
1. For total amount of lease payable.
In the beginning of lease
Fixed Asset Account Debit
Lease Payable Account Credit
In the end of first year and subsequent years.
2. For transfer of Depreciation to Depreciation accumulated account
Depreciation account Debit
Accumulated Depreciation account Credit
In the end of first year and subsequent years.
3. For payment of lease obligation and interest.
( For example, rent payment is of $ 5000 ( lease obligation $ 4000 + $ 1000 )
Lease Payable Account Debit 4000
Interest Account Credit 1000
Bank Account Credit 5000
{B} When there is Operating Lease
In the end of the year and subsequent years.
Rent of Lease Account Debit 5000
Cash Account Credit 5000
Journal Entries in the Books of Lessor
{A} When there is Capital Lease
1. For total amount of lease receivables. It is just like credit sale of fixed asset.
In the beginning of lease
Lease Receivables Account Debit
Fixed Asset Account Credit
In the end of first year and subsequent years.
2. For Receiving the amount of lease.
( For example, rent received is of $ 5000 )
Lease Receivable Account Debit 5000
Bank Account Credit 5000
{B} When there is Operating Lease
In the end of the year and subsequent years.
Bank A Debit 5000
Lease Receivable Account Credit 5000
Example :
Read Also
Related Resources
1. Importance of Lease Finance
2. What is Lease Deed?
3. AS 19 - Lease and its Accounting
1. Importance of Lease Finance
2. What is Lease Deed?
3. AS 19 - Lease and its Accounting
thanks a lot
ReplyDeleteNumber 3 above - 3. For payment of lease obligation and interest - the debits and credits don't match. DR amt is $4000 CR amt is $1000+$5000
Delete3. For payment of lease obligation and interest.
ReplyDelete( For example, rent payment is of $ 5000 ( lease obligation $ 4000 + $ 1000 )
Lease Payable Account Debit 4000
Interest Account Credit 1000
Bank Account Credit 5000
2. For Receiving the amount of lease.
ReplyDelete( For example, rent received is of $ 5000 )
Lease Receivable Account Debit 5000
Bank Account Credit 5000
I received cash so I credit the bank account?? If I receive cash, I would debit the cash account to increase it and credit the receivable account to decrease the receivable? Am I missing something here?