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- Capitalization: Leases are recorded on the balance sheet as a Right of Use (ROU) asset and a corresponding lease liability.
- Expense Recognition: The income statement recognizes both the depreciation of the ROU asset and the interest on the lease liability.
Step 1: Recognize the Lease Liability and Right-of-Use Asset
At the start of a lease, record the lease liability and right-of-use (ROU) asset as follows.
Create General Ledger (GL) accounts
Select the Right-of-Use GL in the GL account credit section, and set the dimension to the item used previously.
accounts named as Right of Use (ROU) asset assets under Non-current assets 
Create Create an Inventory Item
-Set up an inventory item and select the "Right to Use" GL account from the Edit GL Accounts option.
Create an invoice received document. In the main tab, enter the required details and select the Current Finance Lease Liabilities GL under the Accounts Payable column.
In the inventory tab, add the item and complete the necessary details.
Once filled. post the document.
The below entry will be created. Dr Right to use
Cr Current finance lease liabilities.
Step 2: Recognize the Unwinding of the Lease Liability and Amortization of the Right-of-Use Asset
For each reporting period, you need to record the following:
1. Payments Made
Recognize any lease payments made during the period, which will reduce the lease liability. Create a cash/Bank payment document with transaction type Others.
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Dr Current finance lease liabilities
Cr Bank accounts
2. Amortization of the Right-of-Use Asset
Record the monthly amortization expense for Depreciation for a lease is typically recorded under the Amortization Expense, reflecting the expense related to the right-of-use asset, which decreases its value over time. Use the Other Expense document in Accounting for this manual entry each month.(ROU) asset. it is categorized under Operating Expenses on the income statement.
Create a new GL under operating expense GL
Create an expense entry to record the Depreciation-Go to Accounting > Other expense document
Create a new document, then select the accrual option in the main tab, and choose the appropriate relevant entity.
In the expense tab, select the GL Depreciation Expense. In the Account Dr dimension, choose the expense item and select the fixed asset in the fixed asset column (ensure a new one is created if needed).
Select the Add the Amortization Expense GL on the debit side of the document, and on the credit side, include the Right-of-Use GL in the GL account credit section, and set the dimension to the item which was used previously.
The entry will be Dr Depreciation of Fixed assetsAmortization expense (Lease)
Cr Right to use
2. Interest Accrued
Calculate and recognize Recognize the interest expense on the lease liability. This amount reflects the cost of borrowing for the remaining liability.To document interest, utilize the , which represents the borrowing cost. Create a new Other Expense document. First, set up the necessary GL account for Interest Cost under Other Operating Expenses. For Interest Liability, you can select the existing Current Interest Payable or create a new GL account as needed.
After the GL account is established, create a new Other Expense document with the appropriate entry.
Step 6
For rent payments (COS) on the lease, create new GL accounts for Rent Payment under the appropriate category. Next, generate an Other Expense document—record the debit as Rent Payment COS and the credit as Lease Liability.
In the main tab, select the accrual option and choose the appropriate entity.
In the expense tab, add the Financial Expense GL on the debit side and the Current Finance Lease Liabilities on the credit side of the document.
The below entry will be created.
After all the above entries, the financial statements will reflect the following effects:
Income Statement:
- Increased Expenses: Amortization and interest expenses will reduce net income.
Balance Sheet:
- Assets: The Right-of-Use asset will decrease over time due to amortization.
- Liabilities: The Lease Liability will decrease as payments are made and interest is recognized.
Step 3: Continue to Record Journal Entries Until Lease Expiry
Continue posting journal entries at your reporting frequency until the lease ends, provided there are no modifications.
Key Points
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Record entries for lease payments, interest, and amortization.
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These entries will gradually reduce both the lease liability and the right-of-use asset
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to zero by the lease expiry.