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.

To demonstrate, we’ll look at a simplified example and follow the journal entries along with the life of the deal. In our example, we be accounting for leasing a vehicle that was purchased for $5,000, with lease payments totaling to $15,000.

Record posting of operating lease:

As you can see from the above example, the total lease payments are debited to accounts receivable, but a contra asset is also booked as a credit to unearned lease payments. Additionally, the unsold inventory account has a credit entry to remove the cost of the vehicle. The total cost is moved to the leased inventory account.

Remember, the above example is simplified. There may be occasions where the dealership is receipting a cash down payment or taking in a trade. These types of activities would result in balance sheet action, as the trade-in asset would be booked into unsold inventory and the tax on cash down would be sent to a tax liability account.

For BHPH dealers thinking of starting leasing activities, be sure to contact an ABCoA support representative at 1-800-526-5832 to get a full demonstration on Deal Pack Pro’s leasing functionality!