A very basic description of lease accounting for the main two types of leases, operating and finance leases, for non-accounting folks

1. Lease Accounting Basics For Non-Accountants Caia Brookes, 2009

4. What are T-accounts? Asset 1000 Debit on the left Credit on the right Debits must equal credits for any given activity Also can be written: DR Asset 1000 CR Cash 1000 Cash 1000 A way of visualizing an activity hitting your general ledger – each ‘T’ is a general ledger (GL) account

6. Before the Lease – Purchasing the Asset The lessor used to have CASH, but now they have exchanged it for an ASSET (in this case, a fleet of trucks). The value of that asset will decrease over time, via depreciation. CASH Asset Cost Purchase Depreciation

7. Purchase – Example of GL Postings Cash Asset (Trucks) 10000 10000 Cash paid = 10000 * Disclaimer: I made this and the other figures in these examples up! Not necessarily realistic! *

8. Depreciation – Example of GL Postings Depreciation Asset (Trucks) 10000 50 Depreciation this period = 50 50 Cash 10000 Asset value is now 9950

10. Rent Income – Example of GL Postings Depreciation Asset (Trucks) 10000 50 Rent this period = 100 50 Cash 10000 Rent Income 100 100 (Advanced topic: rent may be ACCRUED to income over time rather than recognized as income upon payment)

17. Loans – Example of GL Postings Loan Principal 10000 Principal given to the borrower = 10000 Cash 10000 Notice that any collateral asset doesn’t appear on the GL

18. Loan Payment – Example of GL Postings Loan Principal 10000 Loan payment this period = 100 10 Cash 10000 Interest Income 90 100 (Advanced topic: income may be ACCRUED over time rather than recognized as income upon payment) Loan value is now 9990 Loan payment = principal repayment 10 and interest 90

22. Setting Up the Finance Lease - Where’s the ‘Asset?’ The lessor used to have a hard ASSET (trucks) on the books, but now they have exchanged it for a LEASE (a financial asset, even if it isn’t a tangible asset). The value of this asset will decrease over time, via AMORTIZATION. Asset Cost Lease Out Amortization Total Rec U/e inc Residual Purchase CASH

26. Finance Lease Payment GL Postings Net decrease in lease value 10 Lease income 90 Lease payment 100 Hard Asset 10000 Total Receivable Unearned Income Residual Cash 10000 10000 10000 30000 30000 9000 9000 100 90 90 100 Lease Income Income is calculated similar to loan interest income, using the implicit interest rate (Advanced topic: income may be ACCRUED over time rather than recognized as income upon payment)

28. Life of a Finance Lease – Where’s the ‘Asset?’ CASH Asset Cost Purchase Lease Out End of Lease Sell Depreciation Amortization Total Rec U/e inc Residual