You stepped into an operating lease agreement and as you do that, you also have to pay a considerable amount as the first initial payment (something like 10 to 30% even). This payment is obviously deducted from the total of your payments hence making the monthly payment smaller. As the monthly payment is smaller, there’s one thing to remember with the initial payment though.

The initial payment is never charged as an expense straight away, but recognized as an asset first and the charged into expense over the rental period. It is meant so to spread out the expenses made for an agreement that goes through a longer period.

The accounting entry for recognizing the initial payment is as follows:

Debit Prepaid expenses 1,000
Credit Cash 1,000

With this you create an asset account on your balance sheet and in following periods you’re going to credit the balance in equal amounts.

Your monthly (or whatever the period you make your payments for is) entry looks like this (presuming you have 40 rental payments, the monthly charge is 1,000 / 40):

Debit Operating expenses (rental payments) 25
Credit Prepaid expenses 25

Since the payments are spread over the rental period, by the time the agreement ends and you’ve done your final payment, the prepaid account should also reach zero.