Journal Entries of Lease

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.

1. Capital or Finance Lease

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 :