In daily business, Capital lease accounting journals deals with the analysis of an asset rented by a business under the terms of a capital lease agreement.
Capital lease or finance lease is an agreement between the business (lessee) to rent an asset from a lessor. The rent out company, finance company control the asset, and the business rents the asset in return for a periodic rental payment. The business never controls the asset, at the end of the term it is returned to the lessor or the second period of rental is entered into.
Capital Lease Accounting Journals
The licensed form of capital lease is that the business never controls the asset. however, under a capital lease, the rights and risks of ownership are transferred to the business, for accounting purposes the material of the agreement is reflected and the asset is treated like any other asset as if it had been purchased by the business.
In the event, capital lease accounting analysis deals with an asset as it had been purchased using a loan as finance. Resources undervalue as regular over the term of the agreement, and the lease payments are crack between principal and interest to clear the loan balance over the term and to charge the profit and loss account with the interest.
Types of Leases:
- A banking lease is also called capital lease in the US General Accepted Account Principles in which the risks and rewards inherent in the asset are transferred to the lessee.
- An operating lease in which the risks and rewards inherent in the asset are not transferred to the lessee.
Capital Lease Accounting Example
For Example, a business enters into a capital lease agreement for an asset worth 12,000 and agrees to pay a deposit of 1,500, leaving a balance of 10,500 to be financed by a capital lease with an implicit annual interest rate of 7% requiring a further four annual rental payments of 3,100.
The net amount paid in rentals over the term is 4 x 3,100 = 12,400. This amount can be split into the original amount financed by 10,500, known as the principal amount, and the interest charge of 12,400 – 10,500 = 1,900. In capital lease accounting, the rentals are paid to clear the capital lease principal and interest over the term of four years.
Deposit 1,500 Capital Lease Principal 10,500 Interest 1,900
Rental 3,100 Rental 3,100 Rental 3,100 Rental 3,100
Interest to Accounting Periods
All rental payment will pay an element of principal and interest. If the interest accrued evenly over the term then each rental payment would comprise one-quarter of the total principal and one-quarter of the total interest. In the above example, each of the four rental payments would be split as follows.
|Rental payment = Capital / 4 + Interest / 4
Rental payment = 10,500 / 4 + 1,900 / 4
Rental payment = 2,625 + 475 = 3,100
Capital Lease Journal Accounting Entries
The capital lease accounting journal entries are in three parts.
- To record the effective purchase of an asset using a loan.
- To record the periodic depreciation charge.
- To record the periodic rental payments to clear the principal and to charge the profit and loss account with the interest.