Lease

Posted: November 30th, 2013

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Lease

            GAAP rules were formulated to give a general outlook as to how accounting statements should appear. They have been used over the years by accountants to make sure that their work is standard and that the shareholders can compare the financial statements from one year to another or those of one company to another. Some rules need to be followed when preparing financial statements so that when presented they appear in a way that any accountant in the US can understand. In addition to that, there are disclosure rules pertaining to how a lease should appear on a financial statement. Accountants should put all these into consideration when preparing financial statements so that there is uniformity in the documents (Wood & Sangster 2005)

In GAAP, financial statements are presented in different formats. They are the trading, profit and loss account, cash flow statement and balance sheet. The lease appears in the balance sheet during presentation. It is recorded as it is and any additional changes are recorded. Before recording, the steps an accountant has to follow are:

• Find out if the lease is a capital or an operating lease. This is done by looking at who decides what will happen to the item on lease at the end of the leasing period. If it can be purchased then it is a capital lease, which is recorded differently.
• The asset column is debited in the balance sheet and recorded as Asset lease when recording capital lease.
• The liability column in the balance sheet is credited with the lease price less any payments that had been made, interest calculation or trade-in amount received, and the entry’s title is Lease liability. The heading of the posting should be cash at bank.
• Monthly transactions are recorded by debiting the liability side and crediting the asset side.

The operating lease is recorded in a similar fashion using this same procedure. However, the transaction is credited in the asset column in the balance sheet. The title that is used as a heading is cash in the bank on the asset side where the posting has been made. The amount payable is debited in the general ledger (Bragg, 2006).

The disclosure rules of a leased property apply to both lessor and lessee. They should provide all the information about the property. A general description of the leasing agreement should be provided. The payments that will be made are also revealed according to the total and monthly installments. The lessor in capital leases is also supposed to disclose any unearned profits that compensate against initial direct costs. The costs incurred when leasing a property are also revealed. All these are as per the GAAP requirements.

These rules and regulations ensure that financial statements are similar irrespective of where they were prepared. It means that the accountants are on the same page pertaining how lease agreements are recorded. The disclosure clause aims at showing that the whole process is transparent and that the shareholders in the company are not being embezzled of their profits by management or other involved parties.

Reference:

Bragg, Steven M. The Ultimate Accountants’ Reference: Including GAAP, IRS & Sec Regulations, Leases, and More. Hoboken, NJ: John Wiley & Sons, 2006. Print.

Wood, Frank, and Alan Sangster. Frank Wood’s Business Accounting 1. Harlow, England: FT/Prentice Hall, 2005. Print.