Once you’ve determined it really is an operating lease (i.e. the rights and obligations of an ownership are not transferred) and more so, you’ve made the initial payment for the lease, there’s time to start treating the lease on the statements.

I say “statements” since it affects both, balance sheet and income statement. There are two aspects for the operating lease. 

First, the initial payment, usually a significant amount paid when signing the agreement, should be spread to expenses over the lease term. For an example, if the lease period is say 60 months long, the amount should be divided by 60 and accounted to expenses. The initial payment is first debited to say “Prepaid expenses” account and then credited off the same account into some operating expense account on the income statement.

The second part of the operating lease is the payments themselves after the initial payment. Now there’s actually very little to it. You get an invoice from the lessor and you account this with a credit entry on “Accounts payable” or similar and debit it into an account that’s part of operating expense. The expense as such is linear.

When it comes to preparing the statement of cash flows, operating lease payments are part of the operating profit and are shown as a part of the profit (that is part of the operating activities). Unlike finance lease, operating lease is not shown as your company being financed by someone. Operating lease is a regular payment for an asset you don’t want to own and will return at the end of the term.

That’s putting simple of course J