An accounting balance sheet provides a snapshot view of a company's overall financial picture at a specific moment of time. But if the balance sheet is not completed properly, due to a transaction being recorded incorrectly, then the entire balance sheet will give an erroneous financial picture. Lease transaction information can be recorded more than one way on a balance sheet, so knowing the lease circumstances is critical to accurate reporting.
Determine if the lease is a capital lease or an operating lease. You can do this by looking at who has the power to decide what happens to the vehicle or other leased item at the end of the lease. Is it you or the leasing company? If you have the option to purchase the leased item for a small fee at the end of the lease, then you have a capital lease, and this will be recorded differently on the balance sheet than an operating lease, where you don't have a purchase option -- for instance, with rented office space.
Debit the asset column on the balance sheet for the lease purchase price if you are recording a capital lease transaction. The asset column should have an entry titled, "Auto Lease" (if an auto was the leased item) or "Lease Purchase."
Credit the liability column, next, on the balance sheet for the lease purchase price, minus any down payment, trade-in amount received and interest computation. The liability column should have an entry on it titled, "Auto Lease" or "Lease Liability."
Record monthly payment transactions by debiting the liability column for the lease payment, and then crediting the asset column. There should be a “Cash in Bank" heading on the asset column, and next to it is where this posting should be featured.
Follow this procedure to properly record an operating lease transaction each month: Credit the asset column on the balance sheet, next to "Cash in Bank," and debit goods and services tax (GST) payable.
Make sure that you recognize the differences between an operating lease and a capitalized lease before making entries to the balance sheet or any other accounting statements being prepared.
Incorrectly recording accounting transactions can negatively affect your final financial statements needed for possible business loans or expansion efforts with bankers, board members and investors.