Leases can provide many advantages to businesses, such as higher purchasing power, lower long-term maintenance costs, better cash flow management, and simplified asset disposal. When you rent out or lease your property, you need to track the income from those activities to assess your business’s financial health.
Leases can involve all types of assets, including buildings, equipment, machinery, and vehicles. Leases differ from rental agreements in duration and control. Generally, rentals are short-term, while leasing durations last months or years. Lease accounting is the process that records lease-related activities and refers to lease-related revenues and expenses. These activities are recorded on financial statements, including balance sheets, cash flow statements, and income statements.
The Benefits of Lease Accounting
Lease accounting is important because it aims to properly record and reflect the value of the asset at inception and how the value changes throughout the duration of the lease. Lease accounting also provides proper recognition of lease revenue, expenses, profits, and losses on leased assets. Recognizing and properly valuing lease liability is also a big aspect of lease accounting.
In 2019, new accounting rules changed accounting for leases for publicly traded companies. And by 2021, those changes took effect for private companies. One of the biggest changes to occur was that it became a requirement for lessees to carry the operating leases on their balance sheets — particularly if they have been leasing for more than 12 months. The goal is to help investors gain transparency on the lessee’s long-term liability. Unfortunately, complying with these rules has proven challenging for companies that don’t apply the right accounting systems.
However, there are benefits of the new lease accounting standards. And complying with them can ultimately improve your bottom line. One of the biggest benefits of lease accounting is that it leads to more intuitive insight and, consequently, better budgeting decisions.
To achieve compliance, you will likely implement new lease accounting software. And the right software system results in improved data management because lease contracts and related documents will be centralized. The right system with automation features also means you can save precious time and money that you would otherwise lose if you were still using a manual accounting system. The new lease accounting software makes the auditing process easier and more efficient. The right system allows auditors to log in remotely and can access data without making a physical visit to your accounting department.
Lease accounting also leads to better vendor management because its centralized nature gives you a holistic view of all leases, revealing your organization’s leasing power and opportunities with vendors. Ultimately, lease accounting impacts your bottom line by ensuring your business practices and reporting maintain compliance while also demonstrating transparency and trust. You make better financial decisions with a holistic view of your leasing activities.