Crunchafi

How do I handle monthly lease prepayments?

To handle monthly lease prepayments, it is recommended to use a clearing account to record the prepayment (debit clearing account, credit cash), then during the monthly lease journal entry for an operating lease, debit operating lease expense and credit right-of-use asset, short-term lease liability, and clearing account, ensuring the clearing account reconciles to zero, while recognizing that early or late payments outside the lease terms do not trigger lease reassessment under ASC 842 unless the lessee has an enforceable right to change payment timing.

  1. 1.Crunchafi Lease Accounting
  2. 2.Lease Accounting FAQs
  3. 3.Payments

How do I handle monthly lease prepayments?

We recommend using the clearing account as you would for regular payments

An example would be a client prepaying their lease in advance (e.g., for the June lease, they must pay no later than May 25th). For the payment made on May 25th, processed through the AP system (entry will depend on cash or accrual method):

DR Clearing Account

CR Cash

For the monthly Journal Entry in Crunchafi Lease Accounting (entry shown is based on an operating lease):

DR Operating Lease Expense

CR ROU Asset

CR ST Lease Liability

CR Clearing Account

The clearing account will reconcile to zero once the monthly journal entry is posted. It's important to reconcile the clearing account on a regular basis, noting that when payments are made on a different schedule than what is referenced in the lease document, there will be an unreconciled balance. The decision to make a payment early is an accounting function occurring outside of Crunchafi Lease Accounting and unrelated to ASC 842. The same is also true for late payments made in arrears.

The details of prepayment are important here. If the lessee made a payment a day early so they could get the tax benefit or make sure the mail arrived on time, as in the example above, that is not a trigger for reassessment or remeasurement. KPMG Lease Guide Example 6.7.08 details short payments, which we believe also applies to prepayments.

If the lessee does not have an enforceable right to change the way in which they make the payments, then the lease should be accounted for under its original terms and conditions. If the lessee does have an enforceable right to change the date on which they make payments, then a revision should be added to the software to adjust the Lease Liability and ROU Asset. If a lessee decides to prepay an entire year of lease payments, that might trigger a remeasurement (revision) as well. Details on revisions are here: Lease Revisions & Edits.

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