3 Steps to Help You Account for a Capital Lease

30 January 2017
 Categories: , Blog

If you have lease agreements in place that allow a lessee to purchase an item at the end of the lease period, then your leases can be classified as capital lease agreements. Accounting for these capital lease agreements when preparing your company's financial paperwork can be challenging.

Here are three simple steps that you can take to help ensure you are properly accounting for your capital lease agreements to avoid financial problems in the future.

1. Determine the payment amount and schedule.

In order to ensure that you are tracking your capital lease payments properly, you will need to know exactly how much revenue each lease is generating and when the money is due.

It can be beneficial to structure all of your capital lease agreements in the same way so that scheduled payments will come due for each lease agreement you extend at the same time. Be sure that you credit the correct amount in the correct period to keep your accounting records intact when tracking capital lease payments in the future.

2. Account for the value of the asset at the beginning of the lease.

As soon as you execute a capital lease agreement, you should deduct the value of the asset being leased from your financial records. The amount to deduct should be equal to the amount that will be repaid under the terms of the lease, ensuring that your books stay balanced. Instead of listing the item being leased as an asset, the amount you deduct will be treated as an account that is owed until repayment is complete.

Remembering to deduct the value of the asset from your company's total assets at the beginning of the lease ensures that you won't get into trouble for claiming depreciation on the item when filing your taxes.

3. Set up individual accounts for each lease.

If the repayment terms vary for each capital lease that you execute, it can be beneficial to separate these leases into individual accounts.

Rather than combining all of your capital leases into a single account, designating individual accounts for each lease ensures that you will easily be able to track payments, run reports, and identify which leases are in arrears. By keeping each lease separate, you make it easy for your accounting staff to treat the leases as separate line items when preparing financial reports.

Knowing how to account for a capital lease will allow you to more easily track these lease agreements without wrecking your company's financial records over time. For more information about lease accounting, contact a local professional.