Welcome students.

In today's session we are going to see specialized accounting, unit No. 4 Lease accounting and under
that we are going to see accounting in the books of lessee and lessor, journal entries along with one
illustration.
Following is the outline and these are the things what we are going to cover in our today's session. First,
we're going to see journal entries in the books of lessee. Then journal entries in the books of lesser and
one illustration based on journal entries in the books of Lessee.

The following outcomes will be achieved. The student will learn journal entries of lease accounting in the
books of lessee. Then how to record journal entries in the books of lesser. And. We will be able to solve
one problem based on lease accounting.
To begin with we all understand lease is an agreement between two parties, lessor and lessee. Wherein
lessee agrees to make use of lessors asset in return for a fixed rental known as lease rental. Lesser is the
owner of the asset and lessee is the user of the asset. Now lease accounting is followed to pass entries in
the books of lesser as well as lessee.
The following are the journal entries to be passed on happening of lease. In the books of lessee who is
the user of the asset.
So when the lease rent expense is due, the following entries are to be passed.
Lease rent expense account debit.
To lesser account
narration, being the lease rent recorded for the period.
When the lease rent payment is made. During that time. We write down the journal entry
Lessor account debit.
To bank account.
Narration being payment of lease rent.
Third entry. Is for transferring lease rent at the end of the year. Once the payment is made, the amount is
to be transferred
to their other account. So we transfer it to profit and loss account. So
Profit and loss account debit
To lease rent expense account
and narration being lease rent transferred to profit and loss account.
So these are the three journal entries which are to be followed in case of operating
lease in the books of lessee.
Let us move on with the journal entries. In the books of lesser. The lesser is the owner of the asset So
whenever the lease rent happens, these are the following entries to be passed.
1st for the purchase of the asset.
Asset account debit
To bank account.
Narration, being asset purchased.
For recording operating lease income receivable in the books. We pass.
Operating lease receivable account. Debit
To lease rental income account
Narration being operating lease. Income receivable recorded
next entry is for receipt of lease rental. So whenever any amount is received, we always debit bank
account. So the journal entry over here is
Bank account debit
To operating lease receivable account,
narration being receipt of lease rental.
Next entry is for charging depreciation. Now in case of operating lease, the ownership of the asset
remains with the lessor. Now in that case depreciation is also charged by the lessor. The entry for this is
Depreciation account debit.
To provision for depreciation account.
And narration, being depreciation charged on leased assets.
Next entry is for transfer of lease rental income to profit and loss account. So once the amount is
received, this income is transferred to the profit and loss account. But before that following journal entry is
passed.
Lease rental income account, debit
To profit and loss account
and narration being the transfer to profit and loss account.
For transporting of depreciation. To profit and loss account. We write
Profit and loss account debit
To depreciation account
with the same amount being the transfer of depreciation.

So these are the six entries which are to be passed in the books of lesser on the happening of lease.
Agreement.
Now let us take one illustration on passing of journal entries in the books of lessee
In case of operating lease. ABC Company took a machine on Lease on April 1, 2018. For a period of two
years from XYZ Company. The lease rental was payable at the beginning of both the years rupees one
lakh. Pass journal entries in the books of ABC Company for the year ended 31st March 2019 and 2020.

Now in this problem we can see there are two companies. ABC Company is the lessee which took the
machine on these and company XYZ is the lesser which has given its asset for usage. The lease rental in
this problem given is rupees one lakh. And we have been asked to pass each other entries.
For the year ended 31st March 2019 and 2020. Now as we have seen earlier, there are three prominent
journal entries to be passed. In the case of books of lessee, the first entry is when the lease rate becomes
due. Second entry is when lease rent amount is paid and 3rd entry is for transferring the amount to the
profit and loss so. Let us see the solution of the problem.
The first entry is passed on 1st April 2018, when the lease rent amount is due. The journal entry What we
have seen earlier. Same journal entry we are passing for this that is lease rent expense account debit one
lakh rupees to lesser account one lakh again credited with rupee one lakh. Narration being the lease rent
for 2018 and 19 now this journal entry is past when the lease rent amount becomes due.
This is the further entry. 2nd entry is passed when the amount is paid. And for that we write down same
date. First April 2018. The entry is lesser account debit, one lakh rupee. To bank account credit, one lakh
rupees narration being lease rent paid.
Final entry for this particular financial year is when the amount is transferred or the operating expense is
transferred to the profit and loss account. So that entry is passed on the final day of the financial year,
31st March 2019. It is transferred to. Profit and loss account debit to lease rent expense account one
lakh. the narration being the lease rental transferred to profit and loss account.
So these are the three entries which are passed for the first financial year. Similar. Three entries will be
passed for the next financial year. Next financial year is from 2019 till 2020. Same entries will get
repeated and in this problem the lease rental amount is also the same. So first entry is passed on 1st
April 2019. Lease rent expense account debit to lesser account. Amount is one lakh. Narration, being the
lease rent for 2019 and 2020.
Second entry is passed on first. April, 2019, that is when amount is paid lesser account debit.
To bank account, one lakh rupee narration being lease, rent paid and the final entry for this year is
passed on 31st March 2020. With profit and loss account debit same amount, one lakh to lease rent
expense account
Narration, being the lease rental transferred to profit and loss account.
So in this case, in the books of lessee we need to remember there are three journal entries and the same
journal entries will get repeated for N number of years the lease contract continues.
So in today's class we have seen. Journal entries to be passed in case of operating lease. In the books of
lessee, their journal entries to be passed in the books of lesser. And we have seen one problem of writing
journal entries in the books of lessee. Thank you.