Lease Accounting Fundamentals

Lease accounting has become a critical area for businesses and their financial advisors, especially with the adoption of standards like ASC 842 and IFRS 16. For bookkeepers and accountants, understanding the nuances of lease agreements can be a game-changer in providing value-added insights to clients. Let’s break down the essentials of lease accounting and explore how it can impact your clients' financial strategies.

Types of Lease Agreements
Lease agreements generally fall into two categories:

1. Finance (or Sales-Type) Leases
A finance lease is treated similarly to a purchase. The lessee records a right-of-use (ROU) asset and a corresponding liability at the start of the lease. Over time, interest expense is recognized on the liability, and amortization expense is recorded for the ROU asset. As Warfield et al. explain, “For a finance/sales-type lease, the lessee records a right-of-use asset and related liability at the commencement of the lease” while recognizing expenses using the effective-interest method (Warfield 2022).

2. Operating Leases
Operating leases are more straightforward. The lessee gains control over the use of an asset without ownership rights. These leases are also recorded as ROU assets and liabilities on the balance sheet, but expenses are recognized on a straight-line basis over the lease term. As Warfield notes, “A lessee obtains control of only the use of the underlying asset but not ownership… Expenses are recognized on a straight-line basis over the lease term” (Warfield 2022).

Why Lease Accounting Matters
Lease accounting isn’t just about compliance—it’s about strategy. As accountants, your role extends beyond accurate reporting to helping clients decide whether to lease or buy an asset. For example:

• Finance Lease: This option may suit businesses looking for long-term control or eventual ownership of an asset.
• Operating Lease: Ideal for companies needing flexibility or short-term use of an asset.
  

These decisions can significantly impact cash flow, tax liabilities, and financial ratios.

Turning Lease Accounting Into a Profit Center
Lease accounting isn’t just a cost center—it can drive profitability for your firm and your clients. Al Stabile from CBRE highlights this potential: “The person that can figure out how to take that accounting knowledge and convert that into actually a profit center is what made this unique… We can recover significant funds that will actually have a major impact on the bottom line” (Waters 2025).

For example, by analyzing past lease agreements, you might uncover opportunities where leasing equipment could have been more cost-effective than purchasing outright. These insights not only save money but also position you as a trusted advisor.

Key Takeaways

• Understand ASC 842: Both finance and operating leases now appear on balance sheets as ROU assets and liabilities, offering greater transparency.
• Provide Strategic Advice: Guide clients on whether leasing or purchasing assets aligns better with their financial goals.
• Leverage Technology: Use specialized software to streamline lease tracking and compliance under new standards.
• Add Value Through Insights: Help clients analyze historical data to make better leasing decisions moving forward.

By mastering lease accounting principles, bookkeepers can ensure accurate reporting while helping clients optimize their financial strategies. Whether it’s navigating ASC 842 or providing actionable advice on leasing versus buying, your expertise can make all the difference in improving profitability for your clients.