Leases and How We Handle Them as a Business
When involved in the business of leasing assets to another there is specific knowledge required. This is partly because of the various kinds of assets we are looking to lease and the accounting standards that we will need to be familiar with. Thankfully, dedicated software can take care of much of the accounting side. For instance, accounting software for ASC 842 compliance.
It is worth considering here just what leases are about and how we account for them effectively so that no dates or deadlines are ever missed.
Definition of a Lease and Some Different Types
A lease is considered a contract that will require the user of the asset to pay its owner. This will be during the period of the lease. Commercial or industrial equipment will be leased to save a business the cost of buying it outright. The two parties in the agreement are the lessor, who is the owner of the asset, and the lessee, who is hiring it. Both have obligations. It is important to understand the legal technology concerning leases as well as how they now need to be accounted for with greater visibility on the balance sheet.
The many types of leases available will include a financial lease, operating lease, conveyance type lease, leverage or non-leveraged lease, and sale and leaseback. These are just a few of them. It is the financial lease that needs particular attention because, under the new accounting standard ASC 842, it now needs to be shown as capital on the balance sheet. It is important to correctly define assets in leasing so that they are accounted for correctly. Accounting software can guide you in this process and ensure that leases with different due dates are always kept track of.
How a Business Will Handle Leases?
The best way to deal with leases as a business is to know as much about them as possible in terms of their accounting and their advantages to the customer. To know enough about leases, we should be familiar with the accounting standard ASC 842, and then IFRS 16 and GASB 87, because they complement each other. The purpose overall is to correctly define the leases and responsibilities and to show them accurately and realistically on the balance sheet. This helps business owners, managers, and investors gain a better picture of what is going on with a company’s finances. Then better decisions about changing procedures or whether to invest can be made.
Knowing about the advantages of leases will help a business to sell its leases. For instance, they can promote to a customer that they off lower monthly payments, require less money to start them off, and repair costs will be lower. It is worth checking on the type of lease to determine who pays for maintenance. Also, there is no need to worry about selling an asset later. With leasing, an asset will always be in the best possible working condition because it will never be leased for long enough to become so old and worn that it no longer operates properly.
What Information is Included With a Lease?
Information that will be included in a leasing agreement includes details of the parties concerned as well as their guarantees, details of rent payments and expenses, the lease terms and renewal dates, as well as the business protection clauses. What is written in the contract, in legal terminology, will be to protect both parties. Those leasing the asset will want to know that it is available to them for the period they require it. The owner of the asset, in other words, the lessor, will want to protect the fact that the lessee (hirer) is going to make regular payments to them for the privilege of leasing the asset. Any lapses in payments or periods that an asset is not in use will mean lost revenues for a company leasing assets.
Accounting for Leases
It is good to know that accounting software is available to take care of the financial aspects of leases. It will make the task easier of accounting for the diverse types of leases much easier and faster. Amounts collected must be placed correctly within the accounts and it is important not to miss any due dates. These two things software takes care of, as well as ensuring that the all-important accounting standards are all adhered to. Continued cash flow will result from always being able to effectively keep a track of payments due. Lease accounting software will contribute to improved reputations when customers have the confidence that the other business they are dealing with has the accounting side under control.
How we manage leases as a business will mean the difference between success and failure. Thinking about all the above will help you to focus on what is important.