NetLease - Lease Journal Entries Overview
Lease Journal Entries
Unless stated otherwise in the specific example, all entries below are based on a lease with the following characteristics:
- Lease Type = Equipment
- Commencement Date = 1/1/2021
- Go-Live Date = 1/1/2022
- Term = 24 months
- Initial Payment = $5,000
- Incremental Borrowing Rate = 4.5%
Go-Live Entry:
This is a one-time entry that is booked at the end of the implementation process. It is the entry that puts the ROU Asset, Lease Liability, and ROU - Accumulated Depreciation on the books. The difference goes to a Go-Live Clearing account. A manual entry is needed to remove anything on the books used to track leases prior to implementing NetLease. See example below.
Operating Lease Go-Live Entry:
Financing Lease Go-Live Entry:
Financing Lease Manual Entry:
| Debit | Credit | |
| Equipment | 114,982.86 | |
| Accumulated Depreciation - Equipment | 57,491.40 | |
| Long Term Liabilities | 58,782.34 | |
| Go-Live Clearing | 1,290.88 |
Initial Balance Entry:
For new leases added after NetLease is fully implemented, a go-live entry is not necessary. Instead, an initial balance entry will be used to put the ROU Asset and Lease Liability on the books. If there are any prepaid lease payments, initial direct costs, or lease incentives they will be booked to an ROU - Clearing account.
Initial balance entries are the same for both operating and financing leases.
Initial Balance:
Initial Balance with $5,000 Prepaid Lease Payment:
Offsetting Entry:
| Debit | Credit | |
| ROU Asset - Clearing | 5,000 | |
| Prepaid Expense or Cash/AP | 5,000 |
Initial Balance with $3,000 Initial Direct Costs:
Offsetting Entry:
| Debit | Credit | |
| ROU Asset - Clearing | 3,000 | |
| Prepaid Expense or Cash/AP | 3,000 |
Initial Balance with $1,000 Lease Incentives:
Offsetting Entry:
| Debit | Credit | |
| Lease Incentive Receivable or Cash | 1,000 | |
| ROU Asset - Clearing | 1,000 |
Monthly Amortization Entry:
NetLease generates the amortization schedule and automates the monthly amortization journal entries.
Operating Lease Amortization Entry:
Offsetting Entry: This entry is usually made by the Accounts Payable team and can also be automated using NetLease.
| Debit | Credit | |
| Lease Payable Clearing Account | 5,000 | |
| Cash or Accounts Payable | 5,000 |
Financing Lease Amortization Entry:
Offsetting Entry: This entry is usually made by the Accounts Payable team and can also be automated using NetLease.
| Debit | Credit | |
| Lease Payable Clearing Account | 5,000 | |
| Cash or Accounts Payable | 5,000 |
Non-Lease Payments
NetLease has the ability to keep track of non-lease payments associated with specific leases. NetLease will create monthly journal entries related to these non-lease payments when the monthly amortization journal entries are run. The impact on the monthly amortization entry is the same for both operating and financing leases. The system simply adds one extra line to the entry to record the non-lease expense. The credit to the Lease Payable Clearing Account is increased by the amount of the non-lease payment:
Offsetting Entry: This entry is usually made by the Accounts Payable team and can also be automated using NetLease.
| Debit | Credit | |
| Lease Payable Clearing Account | 500 | |
| Cash or Accounts Payable | 500 |
Lease Modification Entries:
Standard Modification
Entry is the same for both operating and financing leases.
Where the incremental borrowing rate changed from 4.5% to 5% and the lease term changed from 24 to 30 months.
Decrease in Scope
Where the incremental borrowing rate changed from 4.5% to 5%, the lease term changed from 24 to 30 months, and there was a 20% decrease in scope.
Operating Lease:
Financing Lease:
ROU Impairment
Entry is the same for both operating and financing lease.
ROU Impairment of $5,000.
Lease Termination Entry:
Where $5,000 was paid to terminate the lease.
Operating Lease:
Offsetting Entry: This entry is usually made by the Accounts Payable team and can also be automated using NetLease.
| Debit | Credit | |
| Lease Payable Clearing Account | 5,000 | |
| Cash or Accounts Payable | 5,000 |
Financing Lease:
Offsetting Entry: This entry is usually made by the Accounts Payable team and can also be automated using NetLease.
| Debit | Credit | |
| Lease Payable Clearing Account | 5,000 | |
| Cash or Accounts Payable | 5,000 |
Short Term/Long Term Reclass Entries:
The Short Term/Long Term Reclass entry reclasses the short-term portion of the lease liability from the long-term account to the short-term liability account. A second journal entry is booked for the subsequent day to reverse the reclass entry. When done on a monthly, quarterly, or annual basis, this correctly categorizes the short-term portion of the lease liability at period close.
Entries are the same for both operating and financing leases.
Reclass entry on 1/31/2022 (this entry must be run in NetLease under Process Monthly Transactions)
Reversal entry on 2/1/2022 (this entry is automatically booked by NetLease)
A link to the reversal can be found on the Reclass journal entry as shown below: