Deal Pack Blog

Accounting for Operating Leases: Part 2- Receipting Scheduled Lease Payments

posted on: April-14-2014
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 leases do not result in any assets or liabilities recorded on the dealerships balance sheet.

One of the advantages to leasing is the deferred sales tax. With Buy Here-Pay Here (BHPH) or retail programs, the sales tax must be paid up front, well before the dealer has receipted the majority of the money owed to them from the customer. With a lease program, a portion of the total sales tax liability is recognized and paid after each payment received by the customer. Money in and money out!

To demonstrate, we started by looking at a simplified example of an operating lease posting entry (see my previous blog entitled Accounting for Repossessions of Operate Leases: Part 1 – Posting the Lease). In the example, we saw 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

 

Building on the example, we’ll say that the lease contract states that the customer will pay $250.00 monthly, which is broken down as $225.00 base rent and $25.00 sales tax.

To start the entry, the total cash receipted will be recorded as a debit to cash clearing and the tax collected is recorded as credit to the sales tax liability account

G/L Account Debit Credit
Cash   Clearing 250
Sales   Tax Payable 25

 

Similar to sales tax, lease revenue is recognized only when payment is receipted. As the revenue is recognized, the receivable and unearned lease payment balances are decreased (remember, the unearned lease payment account is a contra asset, which means that a credit is booked at lease posting, and debit will reduce the balance in the account).

 

G/L Account Debit Credit
Accounts   Receivable 225
Unearned   Lease Payments 225
Lease   Revenue 225

 

Combining both pieces, we can see the entry made at payment receipt.

G/L Account Debit Credit
Cash   Clearing 250
Sales   Tax Payable 25
Accounts   Receivable 225
Unearned   Lease Payments 225
Lease   Revenue 225

 

For BHPH dealers thinking of starting leasing activities, be sure to contact an ABCoA support representative to get a full demonstration on Deal Pack Pro’s leasing functionality!

 

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