Capital Lease Journal Entries
A capital lease (or finance lease) is a lease agreement in which the lessee (the party renting the asset) essentially assumes the risks and benefits of ownership. According to accounting standards, the asset and corresponding liability must be recorded on the balance sheet. The following journal entries illustrate the common transactions associated with a capital lease:
Scenario: A company enters into a capital lease agreement for equipment worth ₹500,000 with an interest rate of 8% per year.
Journal Entries for Capital Lease
Example 1: Initial Recognition of the Capital Lease
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Leased Equipment A/c | 500,000 | |
| To Lease Liability A/c | 500,000 | |
| (Being recognition of leased equipment) |
Example 2: Monthly Lease Payment (including interest)
Assume the monthly lease payment is ₹10,000, and the first month's interest is ₹3,333 (calculated on the outstanding lease liability).
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Lease Liability A/c | 6,667 | |
| Interest Expense A/c | 3,333 | |
| To Cash/Bank A/c | 10,000 | |
| (Being monthly lease payment including interest) |
Example 3: Depreciation of the Leased Asset
Assume the leased equipment has a useful life of 5 years and the depreciation method is straight-line.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Depreciation Expense A/c | 100,000 | |
| To Accumulated Depreciation A/c | 100,000 | |
| (Being annual depreciation on leased equipment) |
Example 4: Recording Interest for Subsequent Periods
Assume the second month's interest is calculated based on the outstanding lease liability after the first payment.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Interest Expense A/c | 3,200 | |
| To Lease Liability A/c | 3,200 | |
| (Being interest expense for the second month) |
Detailed Examples:
Example 5: Annual Lease Payment (if payments are made annually)
Assume the annual lease payment is ₹120,000, and the first year's interest is ₹40,000.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Lease Liability A/c | 80,000 | |
| Interest Expense A/c | 40,000 | |
| To Cash/Bank A/c | 120,000 | |
| (Being annual lease payment including interest) |
Example 6: Adjusting the Lease Liability for Early Termination
If the lease is terminated early and the company pays a termination fee of ₹50,000.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Lease Liability A/c | 50,000 | |
| To Cash/Bank A/c | 50,000 | |
| (Being lease termination fee paid) |
