Deal Pack Blog

Accounting for Operating Leases: Part 3- Accounting for Lease Depreciation

posted on: June-16-2014
by: Scott Hackett
category: Leasing

It’s clear that leasing is growing as a business in the Buy Here-Pay Here (BHPH) industry, and with dealers jumping into leasing for the first time, it is essential to understand how to account for leasing activities on the books. With operating leases, lessees are contracted to use the asset, but the rights to the ownership of the vehicle remain with the dealership. Accounting for operating leases is commonly termed as “off balance sheet financing”. This is because operating lease receivables do not result in any assets or liabilities recorded on the dealerships balance sheet.

 

With an operating lease, the leased unit remains on the books. However, they do not remain booked as unsold inventory. The total cost of the unsold vehicle is reclassified from unsold inventory, to lease inventory (another balance sheet asset account).

 

To demonstrate, we can start by looking at a simplified example of an operating lease posting entry (see Accounting for Repossessions of Operate Leases: Part 1 – Posting the Lease for more information regarding lease posting entries). In the example, we see the accounting entries made at lease posting for a vehicle that was purchased for $5,000, with lease payments totaling to $15,000.

 

To record posting of operating lease:

G/L Account Debit Credit
Accounts Receivable 15,000  
Unearned Lease Payments   15,000
Leased Inventory 5,000  
Unsold Inventory   5,000

 

The cost of the vehicle will remain in the leased inventory account throughout the life of the lease. However, operating leases must be depreciated over the life of the lease. A residual value is set for the vehicle at point of lease and depreciation is recognized throughout the life of the lease, depreciating the vehicle down to the residual value. A residual value is the estimate of what the vehicle will be worth after the lease is completed.

 

To demonstrate, we’ll say that we recognized $100 of depreciation for our leased unit. The entry to book accumulated depreciation and depreciation expense would show as follows.

 

To record depreciation of operating lease:

G/L Account Debit Credit
Lease Depreciation Expense 100  
Accumulated Depreciation   100

 

 

The Deal Pack advantage is that you don’t have to worry about making any of these entries yourself! With Deal Pack Pro, the depreciation will be calculated and booked for every leased vehicle with the click of a button!

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