If you are in charge of a business or other venture that rents out assets or leases assets out to others, you will need to keep a record of what financial impact these activities have on your business. This process (of keeping records of your rented assets and leased assets) is called lease accounting. Not only will lease accounting help you keep your business organized and successful, but it is also a legal requirement. As such, knowing about lease accounting is a great idea to continue running your business.
As mentioned, lease accounting is the specific process that a company will use to record any financial impacts that their leasing activities will have on their business. These specific activities will need to be recorded on your financial statements, which can include (but are not limited to) cash flow statements, income statements, and balance sheets. Keep in mind that the sheets will look different whether you’re the lessee (you’re using someone else’s asset) or the lessor (someone else is using an asset you own).
So long as you record your financial statements correctly, you’ll be in good standing regarding the health of your business. Additionally, these documents can help you determine how valuable the assets of your company are, and how much impact any lease you’re in charge of has on the health of the company.
There are also two specific types of leases, which are called operating leases and financing leases. Depending on which lease you are operating under will determine how you account for them on your financial statements.