## Accounting for Operating Lease
In an Operating Lease the asset stays on the lessor's books. Accounting is straightforward — it mirrors a normal rent arrangement.
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### Lessor's Books
| Event | Debit | Credit |
|---|---|---|
| Rental received (year-end) | Cash / Bank A/c | Lease Rent Income (P&L) |
| Depreciation on asset | Depreciation (P&L) | Asset / PPE A/c |
- Asset continues to appear on the lessor's balance sheet at cost less accumulated depreciation.
- Depreciation policy is same as lessor's other similar assets.
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### Lessee's Books
| Event | Debit | Credit |
|---|---|---|
| Rental paid (year-end) | Lease Rent Expense (P&L) | Cash / Bank A/c |
- No asset is recorded on the lessee's balance sheet.
- No liability is recorded (beyond accruals for unpaid rent).
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### Straight-Line Recognition Rule
Even if lease rentals are unequal year-to-year, both lessor and lessee must recognize income/expense on a straight-line basis over the lease term — unless another systematic basis better represents the time pattern of the benefit.
$$\text{Annual Straight-line Rent} = \frac{\text{Total Lease Payments over Lease Term}}{\text{Lease Term (years)}}$$