Accounting Treatment in the Books of Lessee
Accounting Treatment in the Books of Lessee has undergone significant changes with the introduction of new standards like IFRS 16 and ASC 842. Checkout Accounting treatment in the books of the lessee
Shruti Dutta9 Jul, 2024
Share
Accounting Treatment in the Books of Lessee : In today's business environment, leasing assets is common for companies seeking to conserve capital and maintain flexibility. Whether leasing real estate, vehicles, equipment, or other property types, proper accounting treatment is essential to reflect these transactions in financial statements accurately. With the introduction of standards like IFRS 16 and ASC 842, the Accounting Treatment in the Books of Lessees has become more standardised, requiring lessees to recognise both right-of-use assets and lease liabilities on their balance sheets.
This article delves into the leasing accounting treatment from the lessee's perspective, outlining the key principles and steps in recording and reporting lease transactions. Understanding these principles is crucial for ensuring compliance with accounting standards and providing a true and fair view of a company's financial position.Accounting Treatment in the Books of Lessee
The Accounting Treatment in the Books of Lessee is as follows: Royalty received by the lessor is credited to the Trading or Manufacturing Account if it is considered regular business income. Conversely, royalty received based on sales is credited to the Profit and Loss Account. Royalty is the sum the lessee pays to the lessor for using the lessor's rights. This periodic payment is generally based on sales or output. Examples of royalties include payments for extracting minerals from a mine, using patents, employing technical know-how, or compensating an author for book sales. Minimum rent, also known as Dead Rent or Rock Rent, is the amount paid by the lessee to the lessor regardless of any benefit derived from the asset. Additionally, the landlord may allow the lessee the right to recoup short-workings. In this case, the lessor will only receive the minimum rent during the recoupment period.Accounting Treatment in the Books of Lessee Format
Below is the table for the Accounting Treatment in the Books of Lessee related to royalty payments, short-workings, and their recoupment in the books of the lessee:| Date | Particulars | Debit | Credit |
| 1. When Royalty is Payable | Royalty A/c (Actual Royalty) | xx | |
| Short-workings A/c | xx | ||
| To Lessor A/c (Minimum Rent) | xx | ||
| (Being payment due) | |||
| 2. For Payment to Lessor | Lessor A/c | xx | |
| To Bank A/c | xx | ||
| (Being amount paid) | |||
| 3. For Transferring Royalty | Trading/Profit and Loss/Manufacturing/Production A/c | xx | |
| To Royalty A/c | xx | ||
| (Being amount transferred to relevant account) | |||
| 4. When Short-workings is Recouped | Royalty A/c | xx | |
| To Short-workings A/c (Recoupment) | xx | ||
| To Lessor A/c – actual payment | xx | ||
| (Being recoupment done) | |||
|
5. For Irrecoverable Short-workings |
Trading/Profit and Loss/Manufacturing/Production A/c | xx | |
| To Short-workings A/c (amt. lapsed) | xx | ||
| (Being amount charged to relevant account) |
What is a Lease?
Leasing is a common method for businesses to acquire assets without making a large initial capital outlay. The accounting treatment of leases has evolved significantly, particularly with the introduction of IFRS 16 and ASC 842, which standardises the recognition and measurement of leases. This article provides a detailed overview of how lessees should account for leases under these standards.Royalty Meaning in Accounting
In accounting, a royalty is a payment made by one party, the lessee or licensee, to another, the lessor or licensor, for the ongoing use of an asset, typically intellectual property such as patents, trademarks, copyrights, or natural resources like oil, minerals, or gas. Royalties are usually calculated as a percentage of the revenue generated from the use of the asset or based on the quantity of goods produced or sold.| Also Read | |
| Abnormal Loss And Abnormal Gains - Overview, Reasons and Calculation | Accountancy adjustments |
| Accountancy: Applications and Its Importance | Double Entry System |
Parties in Royalties Accounting
Several key parties are involved in the transaction and process of Accounting Treatment in the Books of Lessee or in royalties accounting. Understanding the roles and responsibilities of each party is crucial for accurate financial reporting and compliance with relevant standards. The primary parties involved in royalties accounting are:1. Lessor
Role : The lessor is the party that owns the asset or rights (such as patents, trademarks, natural resources, or copyrighted works) and grants the lessee the right to use these assets in exchange for periodic royalty payments. Responsibilities :- Determines the terms and conditions of the royalty agreement.
- Receives royalty payments from the lessee.
- Records royalty income in their financial statements.
2. Lessee
Role : The lessee is the party that obtains the right to use the lessor's asset or rights in exchange for periodic royalty payments. Responsibilities :- Makes royalty payments to the lessor as per the agreement.
- Accounts for royalty expenses in their financial statements.
- Manages any obligations related to minimum rent and short-workings.
3. Author
Role : In the context of book publishing, the author is the creator of the work and is entitled to receive royalties based on the sales of their books. Responsibilities :- Enters into a royalty agreement with the publisher.
- Receives royalty payments based on the agreed percentage of book sales.
- Manages personal accounting for received royalties.
4. Publisher
Role : The publisher is responsible for printing, distributing, and selling the author's books. They collect revenues from book sales and pay royalties to the author. Responsibilities :- Calculates and disburses royalty payments to the author.
- Keeps accurate records of sales and royalty payments.
- Reports royalty expenses in their financial statements.
5. Licensee
Role : The licensee is a party that obtains the right to use a patented technology, trademark, or other intellectual property in exchange for royalty payments. Responsibilities :- Makes royalty payments to the licensor as per the agreement.
- Accounts for the royalty expenses in their financial statements.
- Ensures compliance with the terms of the license agreement.
6. Licensor
Role : The licensor owns the intellectual property (such as patents or trademarks) and grants the licensee the right to use this property in exchange for royalties. Responsibilities :- Determines the terms of the license agreement.
- Receives royalty payments from the licensee.
- Records royalty income in their financial statements.
7. Mining Company
Role : In the context of natural resource extraction, the mining company is the lessee that extracts minerals or other resources from the lessor's property. Responsibilities :- Pays royalties to the lessor based on the amount of resource extracted.
- Accounts for royalty expenses in their financial statements.
- Manages obligations related to minimum rent and short-workings.
Initial Recognition and Measurement
Under IFRS 16 and ASC 842, lessees are required to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet at the lease's commencement date. Right-of-Use Asset :-
Initial Measurement
: The ROU asset is measured at cost, which includes:
- The initial measurement of the lease liability
- Any lease payments made at or before the commencement date, less any lease incentives received
- Any initial direct costs incurred by the lessee
- An estimate of the costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located, or restoring the underlying asset to the condition required by the terms and conditions of the lease.
- Initial Measurement : The lease liability is measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee's incremental borrowing rate.
-
Initial Recognition
:
- ROU Asset : The ROU asset includes the present value of lease payments plus any initial direct costs.
- Lease Liability : The present value of the lease payments is calculated using the incremental borrowing rate.
-
Subsequent Measurement
:
- ROU Asset : Depreciated over five years on a straight-line basis.
- Lease Liability : Interest and lease payments are accounted for annually.
Business Functions Strategy FAQs
What are the journal entries for a finance lease in the lessee's books?
The journal entries for a finance lease in the lessee's books include debiting interest expense for the interest portion of the lease payment and debiting depreciation expense for the depreciation of the Right-of-Use (ROU) asset.
What is lessee accounting?
Lessee accounting involves recording and reporting lease transactions in the lessee's financial statements. This process includes accurately accounting for leased assets, such as real estate, vehicles, equipment, or other property types. Lease accounting follows specific rules and guidelines to report these transactions correctly.
Talk to a counsellorHave doubts? Our support team will be happy to assist you!
Check out these Related Articles
Join 15 Million students on the app today!
Live & recorded classes available at easeDashboard for progress trackingMillions of practice questions at your fingertips
Free Learning Resources
PW Books
Notes (Class 10-12)
PW Study Materials
Notes (Class 6-9)
Ncert Solutions
Govt Exams
Class 6th to 12th Online Courses
Govt Job Exams Courses
UPSC Coaching
Defence Exam Coaching
Gate Exam Coaching
Other Exams
Know about Physics Wallah
Physics Wallah is an Indian edtech platform that provides accessible & comprehensive learning experiences to students from Class 6th to postgraduate level. We also provide extensive NCERT solutions, sample paper, NEET, JEE Mains, BITSAT previous year papers & more such resources to students. Physics Wallah also caters to over 3.5 million registered students and over 78 lakh+ Youtube subscribers with 4.8 rating on its app.
We Stand Out because
We provide students with intensive courses with India’s qualified & experienced faculties & mentors. PW strives to make the learning experience comprehensive and accessible for students of all sections of society. We believe in empowering every single student who couldn't dream of a good career in engineering and medical field earlier.
Our Key Focus Areas
Physics Wallah's main focus is to make the learning experience as economical as possible for all students. With our affordable courses like Lakshya, Udaan and Arjuna and many others, we have been able to provide a platform for lakhs of aspirants. From providing Chemistry, Maths, Physics formula to giving e-books of eminent authors like RD Sharma, RS Aggarwal and Lakhmir Singh, PW focuses on every single student's need for preparation.
What Makes Us Different
Physics Wallah strives to develop a comprehensive pedagogical structure for students, where they get a state-of-the-art learning experience with study material and resources. Apart from catering students preparing for JEE Mains and NEET, PW also provides study material for each state board like Uttar Pradesh, Bihar, and others
Copyright © 2025 Physicswallah Limited All rights reserved.
Get App