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Leasing

lgarsidelgarside Well-KnownRegistered Posts: 122
Can anyone tell me what the accounting entries would be for a lease. I understand that if you say for example hired in a piece of equipment you would just write it off to the expense account. But if you had a piece of machinery and you had monthly payments of 1500 being written off to the expense a/c would this definately be an operating lease?

Is it possible to have a situation where you write the expense off to the expense a/c and after 3 years you own it and then move it to the balance sheet where it could theoretically be depreciated for the remaining two years.

I know you can get some situations where you pay so much as a hire charge and then their is the option to buy it, what would the accounting entries be for this?

Comments

  • BluewednesdayBluewednesday Font Of All Knowledge Registered Posts: 1,624
    For leases look at IAS17. It's all dependent on the substance of the transactions rather than the legal form. You may be dealing with an operating lease, a finance lease or a hire purchase. IF you go through the IAS it will give you the definitions for you to classify it correctly.

    For a piece of equipment that you are renting and will never own, you still may need to capitalise and depreciate if you are renting it over it's useful economic life or the rental payments are substantially the cost of the asset. You will also do so if you are going to be offered the asset at the end of the lease term for a small price (peppercorn rent). A hire purchase and finance lease will always be capitalised and depreciated.

    An operating lease will be expensed but you have to check the terms of a lease because the legal owner may be the finance company but if 'in substance' you get all the risks and rewards of ownership then it will be treated the same as a finance lease.

    In essence a finance lease and hire purchase are easy to deal with but an operating lease always needs closer inspection.

    If you can post any more specific details then I might be able to help you more.
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