When a company rents a physical asset, such as an office building, it can classify the expense as an operating or capital lease. The lease of an asset is considered to be capital if the lease expenditure is classified as a purchase, ownership is eventually transferred to the lessee, or the lease term is greater than 75 percent of the asset's monetary value. On the statement of cash flows, the expenditures for a capital lease are recorded under the operating and financing activities.

Things You Will Need

  • General ledger

  • Lease statements

Figure out how much of the lease payments for the fiscal year were applied toward principal and interest. Separate the two dollar amounts from either the lease statements or the general ledger for accounts payable. The general ledger is where all accounting transactions are recorded, including income received and payments made. Cash inflows are recorded as debits, and cash outflows are recorded as credits.

Calculate the total amount of principal lease payments. The total amount of lease payments applied towards principal are to be recorded as a cash outflow under financing activities. A cash flow statement is a summary of a company's cash inflows and outflows for a specified period. It is divided into three sections: operating activities, financing activities, and investing activities. A cash flow statement helps investors determine the sources of a company's liquidity.

Record the total amount of principal lease payments under the financing activities section. A capital lease expense is considered to be debt, the same way an individual would consider a car loan to be personal debt. The total amount of principal lease payments can be written as capital lease payments. Since the payments are considered to be a cash outflow, the amount would be deducted from any cash inflows under the financing section to arrive at the net cash flow from financing activities.

Calculate the total amount of interest lease payments. This amount should be recorded under the operating activities section of the cash flow statement. The interest lease payments are considered to be a cash outflow since they are an expense. Principal lease payments are classified as financing activities since a debt is accumulated in order to gain an essential asset. Interest lease payments are considered to be a cost of operating a business.

Record the total amount of interest lease payments under the operating activities section. The amount can be written as capital lease interest payments under cash outflows. Interest lease payments will be deducted from any cash inflows recorded in order to arrive at net cash flow from operating activities.