Renting assets is part of everyday business and as it happens, with operating leases there are often enough prepayments required. Question than to the one renting the asset and making the payment should be how this prepayment should be recognized on the accounts.\u00a0<\/p>\n
In my practice I\u2019ve seen too often that those payments are just fully expensed to this year\u2019s results and that\u2019s it. There\u2019s usually no question whether this makes any sense or if it\u2019s even the correct approach. Matter of fact is however that it\u2019s wrong. In essence of course, if the amount is insignificant, by all means, however the only correct approach is to distribute the expense over the rental period.<\/p>\n
For an example you were requested to pay 1,000 as a prepayment for an asset you will be renting for 5 years. Your annual expense from the prepayment is therefore 200. Yes, you\u2019re making the payment when initially renting asset, however the other part of the entry will be \u201cprepaid expenses\u201d or something similar on the balance sheet and not your expense account. Thus once a month you\u2019ll be expensing just 1\/12 of the 200 and this for the 5 year period every month. This \u201cexpensing\u201d means you\u2019re taking the 1\/12 of 200 away from the prepaid expenses account and charging it onto a respective expense account on the income statement.<\/p>\n
In a way those prepayments act just as normal prepaid expenses you\u2019d make for subscriptions and whatnot. Just never forget to actually treat them the same way.<\/p>\n","protected":false},"excerpt":{"rendered":"
Renting assets is part of everyday business and as it happens, with operating leases there are often enough prepayments required. Question than to the one renting the asset and making the payment should be how this prepayment should be recognized on the accounts.\u00a0<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,67],"tags":[],"class_list":["post-3877","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-15-operating-lease"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3877","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=3877"}],"version-history":[{"count":1,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3877\/revisions"}],"predecessor-version":[{"id":3878,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3877\/revisions\/3878"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=3877"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=3877"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=3877"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}