Leasing is a form of financing of fixed assets that is widely used among companies, professionals, SMEs and the self-employed due to its important advantages.
In it leasing contract reflects that one party, generally a financial entity, delivers to the other a productive asset for use or enjoyment, in exchange for the payment of a periodic fee, during an agreed period. At the expiration of the term, the asset can be returned to its owner or acquired by executing the purchase option reflected in the contract.
The installments payable in the leasing contract will be recorded in that document, which distinguishes the part that corresponds to the recovery of the amount of the asset by the leasing entity, excluding the value of the purchase option and the required financial burden.
This contract will be basis for accounting for the first lease entries. However, if the leasing has a variable rate interest, when changes in the interest rate occur, a new table with the recalculated installments will be necessary to be able to account for them correctly.
Main advantages of leasing
- Security for the landlord and accessibility to credit by the tenant. Financial institutions or companies that are dedicated to offering leasing contracts acquire in their name the assets that they lease to third parties with the guarantee that if the client fails to fulfill their part of the contract, that is, pay their rent, the asset stops being leased and returned to the leasing company or bank. In this way, the leasing contract gives landlord security and, since the guarantee is the asset itself, it is a more accessible form of financing for companies and the self-employed.
- Fiscal benefits. Lease payments are a tax-deductible expense, meaning that the total value of the asset can be deducted as an expense, with the exception of the payment of the residual value. In addition, the VAT/IGIC fee is deferred in various exercises, avoiding having an excess of tax borne in the same year that, sometimes, cannot be compensated.
- Financing of the full amount of the property you wish to acquire. The income obtained from its use can be used to pay the leasing installments.
- Possibility to choose at the end of the contract between exercise the purchase option at the end of this and take ownership of the property, or return it and not exercise this.
- There's a lower consumption in CIRBE.
- Avoid obsolescence of company assets. Leasing provides great flexibility and speed to obtain a technological renewal of the equipment and, in addition, facilitates the calculation of operating costs.
How is a lease accounted for?
As specified in the new General Accounting Plan 2007, the lessee or company that signs the leasing contract will register the assets according to their nature, so the fixed assets used under this modality will be posted directly to the fixed assets accounts that correspond at the time of signing the contract, recording as counterpart a financial liability for the same amount, in which the short-term part will be separated from the long-term part.
The financial burden borne by the interest will be distributed throughout the term of the lease and will be charged to the Profit and Loss account of the year in which it accrues.
With the constitution of leasing, for example of a real estate lease, we would make the following entries:
-210 Land
-211 Constructions
-524 short-term creditors for financial leasing
-174 Long-term creditors for financial leasing
For him payment of leasing fees:
-524 Short-term creditors for financial leasing
-662 Interest on debts
-472 HP VAT supported 21 %
-a 572 Banks c/c
At the end of the year, the amortization will be recorded., but in the case of real estate leasing only of the construction, since the land is not depreciated. The seat would be:
-681 Amortization of property, plant and equipment
-a 2811 Accumulated amortization of constructions
It is also important that we keep in mind that accounting amortization will not coincide with tax amortization if tax advantages are applied relating to financial leasing operations established in the LIS.
On December 31 we would also carry out the reclassification of debt from long to short term:
-174 Long-term creditors for financial leasing
-524 short-term creditors for financial leasing
To the end of planned period Two situations can occur:
- That the purchase option is exercised, with which the asset will become your property.
- Don't exercise the purchase option, and then you will have to return it to its owner.
This would be the case of accounting for a financial leasing, being the accounting of operational leasing or simpler renting. Let us remember that operational leasing is one in which, once the contract has expired, the purchase option will not be exercised, as this possibility does not exist.
In this case, the accounts used are those of a normal rental, being recorded in the 621 “Leases and royalties”, with credit to account 410 “Creditors” or the corresponding treasury account.
Fountain: SAGE
