Leases

Businesses often lease assets or property when they don’t have the money to purchase them outright.

Effects on Financial Statements

Some leases create assets and liabilities. Why? Well standard setters (e.g., FASB) see such agreements as a means of financing the use of assets. So it makes sense that the agreements will often have a impact on the balance sheet.

So whether a government, nonprofit, or business leases assets, the lessee will record an asset and liability at the inception of the agreement. Then over time, the assets are reduced and the liability falls as payments are made.  A lease expense affects the income statement as payments are made. And sometimes other expenses such as depreciation or amortization can impact the operating statement.

Accounting Frameworks

The Financial Accounting Standards Board and the Governmental Accounting Standards Board have separate lease standards. So you need to look at those depending on the type of entity you are working with. Both boards have moved in the direction of requiring lessees to record an asset and a liability at the inception of the agreement. There are exceptions such as leases that are less than a year in length.