How to record an operating lease

how to record an operating lease

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Instructions

Determine if the lease is a capital lease or an operating lease. You can do this by looking at who has the power to decide what happens to the vehicle or other leased item at the end of the lease. Is it you or the leasing company? If you have the option to purchase the leased item for a small fee at the end of the lease, then you have a capital lease, and this will be recorded differently on the balance sheet than an operating lease, where you don't have a purchase option -- for instance, with rented office space.

Debit the asset column on the balance sheet for the lease purchase price if you are recording a capital lease transaction. The asset column should

have an entry titled, "Auto Lease" (if an auto was the leased item) or "Lease Purchase."

Credit the liability column, next, on the balance sheet for the lease purchase price, minus any down payment, trade-in amount received and interest computation. The liability column should have an entry on it titled, "Auto Lease" or "Lease Liability."

Record monthly payment transactions by debiting the liability column for the lease payment, and then crediting the asset column. There should be a “Cash in Bank" heading on the asset column, and next to it is where this posting should be featured.

Follow this procedure to properly record an operating lease transaction each month: Credit the asset column on the balance sheet, next to "Cash in Bank," and debit goods and services tax (GST) payable.

Source: ehow.com

Category: Credit

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