In order to accurately account for the lease, businesses use an accounting journal entry to enter a lease accounting transaction into their records. These entries are compiled into the general ledger and used to construct financial statements at the end of a reporting period.
Operating and capital leases are the two most common types of leases and the two general types of journal entries are a simple entry and a compound entry. A simple journal entry contains two line items, the minimum required for any entry; a compound journal entry is an entry with more than two line items. To make it easier for companies to clarify the purpose of each entry when large amounts of entries are made in a reporting period, the preferred method is to use a large number of simple entries rather than a few compound entries.
There are two special types of journal entries that accountants and business owners use – reversing journal entry and recurring journal entry. A reversing journal entry is an entry that is manually or automatically reversed by software in the next reporting period. A recurring entry repeats in every reporting period until a specified end date.
Journal Entry Format
IFRS lease accounting journal entries should include:
- The account name for each debit and credit
- Date and accounting period for the journal entry
- The person entering the recording entry and necessary authorizations
- Journal entry number
- Journal entry classification such as one-time, recurring or reversing entry
- Documentation or a description of the entry
Journal entries are one of the myriad of details which need to be recorded and calculated accurately for an effective lease management program. Lease administration software from CoStar streamlines lease details to effectively manage critical dates, security deposits, financial obligations, insurance requirements and more for any type of leased asset.