How does a lessor account for leases?
ACCOUNTING BY THE LESSOR
The entries to account for operating leases and capital leases for the lessor mirror those for the lessee, but there are some important differences.
Lessor Accounting for Operating Leases
The leased asset appears on the books of the lessor in an operating lease. If the lessor also manufactured the leased property, the leased asset will appear at the cost of manufacturing the item. If the lessor is a financial institution that purchased the property that it subsequently leases, the leased asset will appear at the acquisition cost to the financial institution.
The lessor must also recognize depreciation expense on the leased asset, as it would on other equipment it uses in operations. The lessor also uses the expected useful life of the leased asset, which might exceed the lease period.
Lessor Accounting for Capital Leases
The lessor initially records a capital lease as if it had sold the leased asset to the lessee. (Recall that the lessee records a capital lease as if it had purchased the leased asset with financing provided by the lessor.) The lessor receives a promise by the lessee to make future lease payments, which gives rise to a Lease Receivable.
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