Lease Incentive Accounting Journal Entries

Lease incentives are benefits provided by a lessor to a lessee, often to encourage them to sign a lease. These incentives can include cash payments, rent-free periods, or reimbursement of certain costs. The accounting for lease incentives can vary based on the type of incentive and the accounting standards being followed. Below are examples of journal entries for common types of lease incentives under the assumption of following IFRS 16 / Ind AS 116, which are relevant to Indian accounting.

1. Cash Incentive

Assume a lessor provides a cash incentive of ₹50,000 to the lessee at the commencement of a 5-year lease.

At the commencement of the lease:

Date	Particulars	Debit (₹)	Credit (₹)
2024-01-01	Cash/Bank A/c	50,000
	To Lease Incentive A/c		50,000
	(Being cash incentive received from lessor)

To amortize the lease incentive over the lease term (annually):

Date	Particulars	Debit (₹)	Credit (₹)
2024-12-31	Lease Incentive A/c	10,000
	To Rent Expense A/c		10,000
	(Being annual amortization of lease incentive)

2. Rent-Free Period

Assume a lessor offers a rent-free period of 3 months on a 3-year lease with annual rent of ₹120,000.

Monthly rent after rent-free period = ₹120,000 / 12 months = ₹10,000

To record rent expense for the first 3 months (assuming a straight-line basis):

Date	Particulars	Debit (₹)	Credit (₹)
2024-01-31	Rent Expense A/c	3,333
	To Lease Liability A/c		3,333
	(Being rent expense accrued for rent-free period)
2024-02-28	Rent Expense A/c	3,333
	To Lease Liability A/c		3,333
	(Being rent expense accrued for rent-free period)
2024-03-31	Rent Expense A/c	3,333
	To Lease Liability A/c		3,333
	(Being rent expense accrued for rent-free period)

3. Reimbursement of Costs

Assume the lessor reimburses the lessee for leasehold improvements of ₹100,000.

At the time of reimbursement:

Date	Particulars	Debit (₹)	Credit (₹)
2024-01-01	Cash/Bank A/c	100,000
	To Leasehold Improvements A/c		100,000
	(Being reimbursement of leasehold improvements)

To amortize the lease incentive over the lease term (assuming a 5-year lease):

Date	Particulars	Debit (₹)	Credit (₹)
2024-12-31	Lease Incentive A/c	20,000
	To Rent Expense A/c		20,000
	(Being annual amortization of lease incentive)

Summary

1. Cash Incentive:

   • Debit Cash/Bank A/c and Credit Lease Incentive A/c when incentive is received.
   • Amortize the incentive by Debiting Lease Incentive A/c and Crediting Rent Expense A/c annually.

2. Rent-Free Period:

   • Accrue rent expense evenly over the lease term even during rent-free months.
   • Debit Rent Expense A/c and Credit Lease Liability A/c.

3. Reimbursement of Costs:

   • Debit Cash/Bank A/c and Credit Leasehold Improvements A/c when reimbursed.
   • Amortize the reimbursement by Debiting Lease Incentive A/c and Crediting Rent Expense A/c.

These journal entries ensure the proper accounting treatment for lease incentives in accordance with accounting standards.