Operating Lease Journal Entry
Overview
Operating lease is a type of short-term lease where the company rent an operating asset for the temporary use purpose. In the journal entry, the payment for the operating lease is simply recognized as the rent expense.
Unlike the finance lease, the term in operating lease is pretty short comparing to the whole useful life of the leased asset. Additionally, there is no transfer of risk and reward in the operating lease and the lessor still continues to own the asset during and after the lease period.
Operating lease journal entry
The company can make the journal entry for the operating lease by debiting the rent expense account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Rent expense | 000 | |
| Cash | 000 |
In this journal entry, there is no record of lease asset or lease liability in the balance sheet like those in the finance lease accounting. This is due to, in the operating lease, the risks of ownership remain with the lessor.
Likewise, the accounting entry is simpler in the operating lease comparing to the finance lease. The company as the lessee simply records the payment as an expense (while the lessor records the payment as revenue).
Example
For example, ABC Ltd. leases a car from XYZ Ltd. for one month in November 2020. XYZ Ltd. charges a total of $1,500 in the lease transaction.
In this case, the company ABC Ltd. can make the journal entry for the payment of $1,500 as the operating lease in November as below:
| Account | Debit | Credit |
|---|---|---|
| Rent expense | 1,500 | |
| Cash | 1,500 |
In this journal entry, the $1,500 payment is recognized as the expense in November 2020 for using a car that the company lease from XYZ Ltd. However, this doesn’t mean that there is no other cost for using the leased car. During the lease period, the lessee may incur other costs besides the rental fee.
For example, as the lessee, ABC Ltd. will usually incur other costs such as costs for gas for using the car during the lease period. These costs are also recognized as an expense; though it is not a rental expense as the payment in the operating lease.