I hope someone can help me - I'm sure the answer is obvious but I'm beginning to tie myself up in knots!
We have recently entered a lease agreement to lease a coffee machine over 39 months.
I am stuggling with the accounting entries.
I believe that the machine itself needs to be classed as an asset, and a liability should be entered for the value of the lease. These amounts should be equal. I also believe that the payments themselves should be reflected in the P&L.
We have received an invoice for the first year of lease payments which is direct debited over the course of the year
- Entry 1
- Debit Asset account for 1st year value of the machine
- Credit Liability (A/P account) for 1st year value of machine
- Entry 2
- Debit Asset account for long term liability account for remaining value of machine
- Credit Long term liability account for remaining value of machine as yet uninvoiced
This creates the value of the asset and the short term and long term liability representing the lease.
The lease payments should be recognised in the P&L. This is the bit I am struggling with.
Recording the DD payments against the invoice in the A/P account will obviously reduce the value of the short term A/P liability to £0 over the course of the first year.
It will also create a credit entry in the bank account.
How then do I get these payments to show up in the P&L...?
Thanks for your help!