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Meet Your Updated General Ledger Accounts Under the New Lease Standard

The new lease accounting standard renames capital leases as finance leases with unchanged accounting but requires them to be separately recorded from operating leases, while operating leases must now be recognized on the balance sheet by adding right-of-use assets and lease liabilities without short-term asset classification or interest/amortization expenses, and initial entries typically do not affect equity, marking significant changes in general ledger treatment and financial statement presentation.

The new lease standard requires you to account for leases differently on your financial statements, which includes your general ledger. This blog outlines what's new, including intricacies and potential surprises to watch out for as you help clients implement the standard.

Capital leases

There are two main changes:

  1. 1.Name Change: Capital leases are now called finance leases. The accounting for these leases remains the same—you still record the asset, liability, interest, and amortization.
  2. 2.Separation from Operating Leases: Finance leases (formerly capital leases) must remain separate on the books from operating leases. More details on operating leases are provided in the next section.

Operating leases

The addition of operating leases to the balance sheet is the core of the new lease standard. Previously, only items like prepaid or deferred rent appeared on the balance sheet, while operating lease expense mainly affected the income statement.

To record an operating lease on the balance sheet, you need to add the right-of-use (ROU) asset and lease liability. Guidance on how to do this can be found in resources about initial journal entries and side-by-side examples of financial statements.

Important notes as you transition to the new standard:

  • There is no concept of a short-term asset for leases, so you won’t break out short- and long-term assets (but you will for liabilities).
  • You will not have interest and amortization expenses for operating leases as you do for finance leases. The lease expense booked under ASC 840 will be the same recognized under 842.
  • There is no concept of deferred or prepaid rent for operating leases; instead, you recognize the straight-line lease expense. The difference between cash and the straight-line expense will flow through the ROU asset.
  • In almost every case, equity is not affected when writing initial journal entries under the new standard. This is important because, traditionally, accounts are balanced through equity. Under the new lease standard, differences flow through the ROU asset.

Side-by-side examples

If you prefer visual examples, you can review side-by-side examples of balance sheets and income statements before and after the new standard to better understand these changes.