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How is the accounting for lease transactions done?
Accounting for lease transactions are done on the following basis:
1) Financial accounting point as well as income tax point of view should be considered.
2) Financial accounting point of view: the lease rent paid by the lessee in respect of operating lease is treated as revenue expenditure and is debited to Profit and Loss Account. From Income tax point of view the same is treated as revenue expenditure which reduces the taxable profits of the lessee.
3) Financial accounting point of view: the lease rent paid by the lessee in respect of financial lease is divided into two parts- finance charges and principal amount. The financial charges are treated as revenue expenditure and are debited to Profit and Loss Account and the principal amount is used to reduce the liability. Depreciation is calculated by the lessee as per his depreciation policy. From Income tax point of view the same is treated as revenue expenditure which reduces the taxable profits of the lessee.
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