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An operating lease is an expense. Here's why ... Unlike capital leases, operating leases have no ownership at the end of the lease. A good example of an operating lease would be your lease payment on business space. At the end of the lease, you will not own the working space. What you get is temporary use of the space. Leasing high tech equipment like computers that become obsolete quickly is another example. You turn it back in at the end of lease and get the newest model for your next lease. You don't assume the risk of the equipment becoming obsolete. The small business accounting procedure to book an operating lease payment is easy. You would record this entry each and every time you make a payment: Debit Lease expense including PST(income statement)
In Canada, if your intent is to not purchase the vehicle at the end of the lease (even though you have the option) ... you can record it as operating lease if you treat any deposit as a prepaid expense (the matching principle dictates this) ... particularly if you have a past history of treating other similar transactions in the same manner where you did not purchase at the end of the lease. Accounting is supposed to be practical ... so professional judgement with regards to the substance / intent of the transaction is allowed (which means your accountant, who has studied and has knowledge of all the rules, should be making this call not you). Your accounting policy should be clearly disclosed in your financial notes. Lease obligations are more than basic debit and credit bookkeeping ... so make sure you bring your treatment of the lease to your accountant's attention at year-end ... to ensure you have the right accounting treatment (ASPE GAAP or IFRS GAAP or tax). So What's All The Fuss About? Unlike capital leases, operating leases keep debt "off the books" ... which could be misleading to anyone basing financial decisions on the financial statements for that company. It is important to note that if your company has operating leases, GAAP requires that you disclose the future lease payments in the notes attached to the financial statements. An article at www.employeebenefits.co.uk on August 23, 2010 reported that IASB and FASB have published a joint proposal on vehicle lease accounting called "the right of use" model. It would require all leased assets to be capitalized. The British Vehicle Renting and Leasing Association thinks it is unlikely the standard will be implemented for at least five years. You can find the entire article at http://www.employeebenefits.co.uk/item/11254/23/5/3 .
For tax purposes, there is no distinction between a capital lease and an operating lease. If you are a sole proprietor, you report computer and other equipment leases on line 9270 of Form T2125. Vehicle leases are reported a bit differently on line 9281 of For T2125. Please remember that financial reporting standards are not the same as tax reporting standards. There are differences between the two. The June 16, 2010 IPBC newsletter had a question about what vehicle cost gets used for the standby charges calculation when a company buys out a leased vehicle. The columnist referred to CRA Bulletin IT-63R5 Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - After 1992. If the buyout amount was a reasonable amount at or near FMV, then CRA will likely accept that the buyout amount is the cost used in calculation of the standby charge. The columnist explained that in Canada, most buyout amounts are set at the average price ... meaning some cars will be worth more and some less due to the driving habits of different drivers and the use of each vehicle. However, if the buyout was a bargain purchase amount and did not represent FMV of the vehicle, then the bookkeeper should revert to the original cost of the leased vehicle when calculating the standby charge. If you are unsure, don't hesitate to call CRA business enquiries. If possible, see if they can site you a source when they respond ... and remember to ask for their ID and call center to add to your file notes. Vehicle and Equipment Purchases Did you buy instead of lease? Well that's handled a bit differently ... of course! Let's take a quick peek at the accounting for capital purchases. The big thing to remember is that capital assets are NOT operating expenses ... they're .. well ... assets. :0) Any vehicle, equipment or capital asset you purchase (as opposed to lease) is capitalized and amortized (expensed) over the life of the equipment ... amortization is accounting speak for depreciation. It is booked this way because of the matching principle. You may also hear your accountant talk about capital cost allowance (CCA) ... CCA is tax speak for depreciation. Revenue Canada has different rules for depreciation than generally accepted accounting principles (GAAP) or Accounting Standards for Private Enterprises (ASPE - the new Canadian standard for small business approved and released in December 2009) ... ... so if you hear CCA ... think your tax return. If you hear amortization ... think your financial statements. In my article on The Income Statement ... You Want to Understand Profitability, there is a list of questions to help you decide whether a purchase should be expensed vs capitalized. The bookkeeping entry on how to record the purchase of equipment is found in the article How to Record Common Bookkeeping Entries.
Here are links to very useful calculators that help you decide whether it is better to buy or lease that piece of business equipment. Canadian equipment calculator - lease vs. buy Canadian vehicle calculator - lease vs. buy The Bookkeeping Forum Q&A Links
Here are leasing related topics ... and some equipment/vehicle topics ... that have been covered in The Bookkeeping Forum. Feel free to check them out and give your opinion or share your expertise.
Used Car Bookkeeping
Used Car Lot Trade In
Asset Purchase With Trade-In
I am currently studying to take my Certified Professional Bookkeeping exam (March 2010).
Hire-Purchase & Lease
How do I record a hire-purchase transaction? Initial entry for car purchase My wife started a small house-cleaning business in partership with our daughter. Annoyed at the hassles of trying to use our much-in-demand personal vehicle ...
Vehicle Operating Leases
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