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A capital lease, referred to as a finance lease under ASC 842 and IFRS 16, is a lease that has the characteristics of an owned asset. In accounting, for a capital lease, the lessee records the leased asset as if he or she purchased the leased asset using funding provided by the lessor.

Operating leases are shown as an asset on the balance sheet, valued as the present value of the lease payments (not the market value of the asset) The lease liability is shown on the balance sheet (similarly, the present value of the lease payments)

The lessee reports the lease as both an asset and a liability on the balance sheet due to their stake as a potential owner of the asset and their required payment. They also report individual lease payments as expenses on the income and cash flow statements.

Lease payments. As the company receives lease invoices from the lessor, record a portion of each invoice as interest expense and use the remainder to reduce the balance in the capital lease liability account. Eventually, this means that the balance in the capital lease liability account should be brought down to zero.

The company can make the finance lease journal entry by debiting the lease asset account and crediting the lease liability account. In this journal entry, the amount of lease asset or lease liability recorded is the fair value of total lease payments.

Accounting for an Operating LeaseClick on the Create icon 2a01.In the Other column, choose Journal Entry.Add the relevant asset account for Operating Lease- Right-of-Use asset. Debit the present value of your lease payments.Choose the applicable liability account and input the present value of your lease payments.Jan 7, 2020

An operating lease is treated like rentinglease payments are considered as operating expenses. Assets being leased are not recorded on the company's balance sheet; they are expensed on the income statement. So, they affect both operating and net income.