What Is Lease accounting?

The leading asset is common for all types of companies and sectors. There are many benefits of leases, but the primary benefit is that it enhances the purchasing power of a business and reduces maintenance costs, along with other cash flow benefits. However, lease accounting is also an issue for most brands because of the rules and regulations. In this article, we will tell you all about leasing and what lease accounting is.

What Is A lease?

?The contract between two for temporarily utilising an asset is known as a lease. Companies and businesses opt for several types of leases according to the specific needs of their business and agreement. Several types of assets can be leased, such as properties, equipment, etc. Both agreed parties would have to sign the lease document.

?Who Is A Lessor?

?A lessor is a person who owns the leased asset. Lessors, in return, will get the payment for transferring their right to use the entity during the term, although the lessor still holds the ownership.

?Who Is A Lessee?

?A lessee is a person who pays for the day-to-day use of the leased asset during the term. The monthly payment and the term are agreed upon and written on the lease agreement.

?What Is Lease Accounting?

?It refers to the treatment of the lease-associated expenses and revenues for the financial record, which helps to report and keep. Accounting practices from the rule-setting companies such as the FASB, GASB, and IASB governs are deployed for accounting purposes.

?The lease accounting helps to reflect the nature of the underlying agreement for primary considerations such as the following:

1. ?Inspecting and valuing the asset during the inspection period and as the value changes during the lease duration and term.
2. Proper lease recognition liability on the balance sheet of the lessee.
3. Proper income statement recognition, such as the expenses and revenues, along with the losses and profits of the leased assets.

?Lessor Vs. Lessee Accounting

?Lessors have 3 primary accounting treatments applicable on the given lease, whereas the lessee has only two. Choosing the right type of lease treatment starts by determining the lease classification defined by accounting standards. After determining the designation, the lessor must make journal entries and disclosures.

?Leases are classified as direct financing, operating, or sales-type leases based on the included tests in the standards.

• ?Sales-type leases?are outright sale leases considered an underlying asset. In other words, the lessors can remove it from their balance sheet and add a new asset to it as a replacement. The lessor will also recognize the profits and losses on the leased asset. As the term goes on, the lessor will keep recording the income and reduce the lease balance.
• ?Operating leases:?the lessor will retain the asset and the depreciation and record the payment for the lease. In simple words, leasing office space in a building with several occupants. Because it is more like a rental, the lessor will retain the related accounts and buildings, such as the depreciation account.
• ?Direct Financing Leases are?between the sales and operating leases but much closer to the sales type. With the lease type, the accountant will work similarly to the sales type but will defer any type of loss or profit of the asset as it won’t be an outright sale.?

?Conclusion

?Lease accounting can be beneficial in one or two ways. Because the leasing terms go on for a long time, having an accountant can help maintain your records and prevent you from making any wrong calculations.

Written By CA Karan Ranka