Leases (ASC 842)

Open Accounting > Leases to record the equipment, vehicle, yard and office leases your company is the lessee on. Each lease carries a monthly schedule built with exact decimal math, and that schedule drives the journal entries and the disclosures.

Add a lease

Enter the classification (operating or finance), the commencement month, the term (including renewal options you are reasonably certain to exercise), the monthly payment, an annual escalator, whether payments are due in advance or in arrears, and the annual discount rate with its source: the rate implicit in the lease, your incremental borrowing rate, or the risk-free rate if you elected it for that asset class. Initial direct costs and incentives received are optional. A purchase option you are reasonably certain to exercise is refused for now: it makes an operating lease a finance lease (ASC 842-10-25-2(b)), and a finance lease with one amortizes the right-of-use asset over the asset’s useful life, which the app does not do yet. Record those leases by journal entry.

When you add a lease that is not short-term, the app posts the commencement entry: debit the right-of-use asset and credit the lease liability at the present value of the payments. The discount rate is the annual rate divided by 12, compounded monthly. Lease terms are locked once added. To remove a lease entered by mistake, open it and Void lease with a date and a reason: the app reverses the commencement entry and every run line for that lease, and later runs, the daily job and the disclosures skip it.

How each type posts

• Operating: one straight-line lease cost each month. The liability accretes at the discount rate, and the right-of-use asset amortization is the difference.
• Finance: interest on the liability plus straight-line amortization of the right-of-use asset, so total cost is higher in the early months.
• Short-term election: for a lease of 12 months or less with no purchase option you are reasonably certain to exercise, payments are expensed and nothing goes on the balance sheet.

Payments clear through the payment account you choose (2130 Accrued Expenses by default). Record the lessor’s bill or check against that same account.

Monthly runs

Leases > Monthly runs previews and posts one entry per period. For each lease the run posts everything due to date that is not yet posted: lease cost, interest, amortization, payments, and the reclass that keeps the next 12 months of principal in the current lease liability (2535/2536) and the rest in noncurrent (2741/2742). A skipped month is caught up by the next run. The daily accounting job also posts the most recent month that has ended, but only into an open period. To correct a run, reverse it with a date and a reason, and the next run catches up again. The reversal date defaults to the run’s own date; a later date catches the reversed months up in that later period instead. You cannot post an earlier period after a later lease entry exists.

Disclosures and the cash flow

The disclosures panel and GET .../accounting/leases/disclosures show the following, operating and finance kept apart:

• lease cost by type
• cash paid, split between operating and financing cash flows
• right-of-use assets obtained in exchange for new lease liabilities
• at the as-of date: the right-of-use assets, the current and noncurrent liabilities, the weighted average remaining term and discount rate, and a maturity table (years 1 to 5, then thereafter, less imputed interest) that reconciles to the liability

On the statement of cash flows, commencement entries are noncash. They are left out of the operating, investing and financing sections and shown as a supplemental noncash line. New template accounts classify operating lease balances as operating and finance lease liabilities as financing.