Theory and Practice
✘ Does not apply to US GAAP (ASC 842) Finance Leases
✔ Applies to US GAAP (ASC 842) Operating Leases
✘Does not apply to IFRS (IFRS 16)
✘ Does not apply to UK GAAP (FRS 102)
For operating leases, US GAAP recognizes a single lease expense each period (often equal to the straight-line rent) rather than separate interest and depreciation in the Income Statement. However, the lease liability still unwinds with interest in the background. Here, the “straight-line” expense is to be recorded on the Income Statement.
| Account | Debit | Credit |
|---|---|---|
| Lease Expense | $9,849.60 | |
|
Lease Liability Note: to accrue interest on the liability, increasing the liability |
$839.32 | |
| Right-of-Use Asset (or Accumulated Depreciation on Right-of-Use Asset) | $9,010.28 | |
|
Under ASC 842 operating leases, the total lease expense is kept level. In this example, approximately $10k is charged to expense, which implicitly includes the ~$800 interest portion and ~$9k use of the asset. The lease liability increases by interest and is reduced by the cash payment (debit $10k when it occurred), and the ROU asset is amortized (credited) by the depreciation. This results in both the liability and ROU asset declining, while a single operating lease expense is reported in the Income Statement. If lease payments were uneven (e.g., escalating rents), the lessee would still recognize lease expense on a straight-line basis. Any difference between cash paid and straight-line expense is managed via the ROU asset. In practice, this is calculated by determining a daily or monthly cash value for the lease (total payments divided by lease term). Depreciation is calculated as cash value less interest for the period. Daily calculations may be aggregated monthly, so Lease Expense may vary based on the number of days in a month. |
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Doing it in Sage Intacct Lease Accounting
Once a lease has been placed in service, GL entries can be generated automatically or as manually initiated by a user. Read more on this topic here.
Two journal entries are created. One for the Interest component and a second for the Depreciation component of the expense. Note that both debit the same expense account.
