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Accounting entries for Assets purchase on Lease agreement

Accounting entries for Assets purchase on Lease...

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Can anyone confirm the acocunting entries for assets purchased under a lease finance agreement as being the following:

For total cost (Balance Sheet):

DR - Fixed Asset Account
CR - HP Purchase Loan Account (Excluding interest)

For monthly lease repayments:

DR - HP Purchase Loan account
DR - Vat
DR - HP Interest
CR - Bank

Depreciation of Asset:

CR - Fixed Asset (Balance sheet)
DR - Depreciation Account (P&L)

Might seem a simple question but want to be clear.

Paul Barnes

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By frauke
03rd Apr 2007 12:03

Lease?
You need to check out the lease agreement terms.

HP or Lease?

With some leases there is no Asset as the Asset is owned by the leasing company.

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By angehodgson
03rd Apr 2007 12:50

Is title really relevant?
Is the ownership of the asset strictly relevant here? In most, if not all, HP and long-term (capital) lease agreements title remains with the HP/leasing company until full repayment or fulfilment of any other additional conditions in the agreement.

The company is still required to account for the lease/HP contracts with regard to the substance of the contracts rather than the legal nature of the contracts. So if the company has use of the asset and is responsible for maintenance of the asset during the lease/HP contract, then the asset appears on their balance sheet with a corresponding liability representing the balance of the lease/HP contract. During the period the contract is in effect, finance and operating charges will be posted to the P&L (along with any VAT that cannot be recovered) and capital charges will be posted to reduce the liability on the balance sheet. Depreciation is posted in line with the company's usual policy.

In effect, the lease/HP agreement is treated in a similar way to a mortgage where the loan is secured against a capital asset other than land or buildings.

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By neileg
03rd Apr 2007 13:48

To answer your question, Paul
Yes that looks fine to me.

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By Briar
04th Apr 2007 15:43

But what about the interest allocation?
I have seen many accountants (including large firms) allocate the interest on an equal instalment method (which does not comply with GAAP) - even ICAS teach it at their introductory stage! It is very simple to construct a spreadsheet to allocate the interest on a "true rate" basis and then you can properly account for the interest (and get more tax relief earlier)

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By John Murdock
04th Apr 2007 13:41

VAT ON HP
Surley if the asset is purchased on HP the asset becomes your property immediately and therefore the VAT would be recoverable straight away. The entries for the monthly payments would not therefore have a VAT entry as this has already been recovered

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By Anonymous
04th Apr 2007 14:52

VAT
Yes that's right. The VAT must be accounted for straight away, and the total outstanding (net of interest) should be credited to the HP loan account.

Then each re-payment will have both a capital and an interest element. The capital goes against reducing the HP liability, and the interest should be charged directly to the P&L.

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By neileg
04th Apr 2007 17:05

Too imprecise
The terms 'lease finance' are a bit imprecise. So far as I am aware, there are three different forms of finance that could be termed 'lease finance'.

An agreement that is effectively an HP agreement but is outside of the terms of the Consumer Credit Act, is often called lease purchase. Here you would treat the asset as if it was bought outright, and VAT would be charged and recovered on the capital cost of the asset at the point of the agreement commencing.

A finance lease is a lease that transfers substantially all of the risks and rewards of ownership to the user. You should treat the transaction as bought outright but VAT will be charged on each lease payment, not on the capital cost.

An operating lease is one where the risks and rewards of ownership stay substantially with the leasing company. You don't capitalise and the VAT is recovered on each payment.

I think the terms of the question suggest that this is a finance lease.

The question of title to the asset is immaterial to the accounting treatment. In none of these three cases does title pass at the outset. In the case of an operating lease, if the user has the option to take title, this makes it a finance lease, whatever else is stated.

UK GAAP disregards immaterial items. Treating HP interest on a straight line basis is acceptable if the difference is not material.

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By La BoIS Saint
04th Apr 2007 17:29

Some points
Assuming we are talking about a finance lease (the distinction between FL & HP is confused by many):

Under FRSSE 2005 Para 7.4 straight line allocation of interest is permitted if a reasonable approximation.

Depreciation should be over no longer than the lease term (but consider secondary period).

If the asset is a vehicle I assume the 50% VAT disallowance is still in force which adds to the fun!

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By Mikec1965
29th Jun 2013 13:18

Capital Allowances

OK, so with an HP agreement, title doesn't pass to the purchaser until after the final payment has been made. The asset is still capitalised and depreciated, but are there any restrictions on Capital Allowances?

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By Jeanett
30th Sep 2014 12:30

interest on an asset thats financed

Entries are as follows

Accounting entries for Assets purchase on Lease agreement

For total cost (Balance Sheet) when asset is purchased :

DR - Fixed Asset Account Vehicles

DR – amortized interest

DR – vat

Dr – bank charges
CR - HP Purchase Loan Account

For monthly lease repayments:

DR - HP Purchase Loan account
CR - Bank

Depreciation of Asset:

CR - Fixed Asset (Balance sheet)
DR - Depreciation Account (P&L)

 

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By Jeanett
30th Sep 2014 12:32

interest on an asset thats financed

interest on a lease is written back monthly between the amortized interest account and the income statement account interest paid .

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By hayabanu3
16th Aug 2015 12:35

assets purchased on leased

if an assets purchased on lease not completed yet. especially building. can we count dep after completion only.

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By karen reid
22nd Oct 2016 17:38

what if the asset is purchased "fixed sum loan agreement"

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