If you’ve been managing leases as a lessee for a while, you might remember ASC 840, the old lease accounting standard that kept certain leases off the balance sheet. That approach made it hard to get a full picture of an organization’s financial obligations, often leaving stakeholders, auditors, and even accounting teams working with incomplete data.
The Financial Accounting Standards Board (FASB) introduced ASC 842 to bring greater transparency and consistency to financial reporting.
Now, any lease longer than 12 months must be recorded as both an asset and a liability on the balance sheet. No more hidden lease obligations, everything is front and center.
For nonprofit, higher education, and healthcare teams, this shift means clearer financial reporting, better decision-making, and more accountability.
However, it also comes with added complexity, especially when it comes to ASC 842 journal entries. That’s why understanding how to properly record leases under ASC 842 is critical.
Not all leases are the same, at least, not under ASC 842. When recording leases, the first step is determining whether it falls into one of two categories: finance lease or operating lease.
The distinction comes down to whether the lease is more like a purchase or a rental agreement.
The classification determines how the lease is recorded on financial statements:
Once a lease is classified as operating, the next step is properly recording it under ASC 842. This involves two key stages: initial recognition and subsequent recognition.
At lease commencement, two things happen:
An organization signs a 4-year lease starting January 1, 2025. The lease requires $8,500 monthly payments, with a 3% annual increase and a discount rate of 4.5%. The total lease payments over the lease term will be $426,979.20.
Using the present value of future lease payments, the initial lease liability is calculated as $380,245.00.
| Month/Year | GL Description | Debit | Credit |
| 01/2025 | ROU Asset | 380,245.00 | |
| 01/2025 | Lease Liability | 380,245.00 | |
| 01/2025 | Lease Liability | 8,500.00 | |
| 01/2025 | Cash (Initial Payment) | 8,500.00 |
The ROU asset includes the lease liability plus any prepaid lease payments and initial direct costs.
The Lease Liability is the present value of all future lease payments.
The Cash entry records the first month’s payment made at lease commencement.
Unlike finance leases, operating lease expenses under ASC 842 are recognized on a straight-line basis over the lease term. This means the expense is the same every month, even though actual cash payments may vary.
Each month, the organization records:
For the above lease example, the monthly straight-line lease expense is $8,895.40.
| Month/Year | GL Description | Debit | Credit |
| 01/2025 | Lease Cost | 8,895.40 | |
| 01/2025 | ROU Asset | 7,115.40 | |
| 01/2025 | Lease Liability | 1,780.00 | |
| 01/2025 | Lease Liability | 890.00 | |
| 01/2025 | Lease Liability - Short Term | 890.00 |
Over time, the ROU asset and lease liability continue to decrease until the lease term ends.
If a lease is classified as a finance lease under ASC 842, it’s treated more like an asset purchase than a rental. This means that, instead of a straight-line lease expense, the lessee records both interest expense and amortization expense over the lease term.
At lease commencement, like with an operating lease, the lessee records the ROU asset and the lease liability.
An organization signs a 5-year lease starting January 1, 2025. The lease requires $12,000 monthly payments, with a 5% annual increase and a discount rate of 5.2%. The total lease payments over the lease term amount to $829,248.00.
Using the present value of future lease payments, the initial lease liability is calculated as $720,000.00.
| Month/Year | GL Description | Debit | Credit |
| 01/2025 | ROU Asset | 720,000 | |
| 01/2025 | Lease Liability | 720,000 | |
| 01/2025 | Lease Liability | 12,000.00 | |
| 01/2025 | Cash (Initial Payment) | 12,000.00 |
Unlike operating leases, finance leases break out costs into two separate expenses:
| Month/Year | GL Description | Debit | Credit |
| 01/2025 | Interest Expense | 3,120.00 | |
| 01/2025 | Lease Liability | 3,120.00 | |
| 01/2025 | Amortization Expense | 12,250.00 | |
| 01/2025 | Accumulated Amortization | 12,250.00 | |
| 01/2025 | Lease Liability | 5,600.00 | |
| 01/2025 | Lease Liability - Short Term | 5,600.00 |
As the lease liability is reduced, the interest expense decreases. The amortization expense, however, remains consistent each month.
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While most leases follow standard journal entry procedures, certain lease transactions require special treatment under ASC 842.
Lease incentives are benefits provided by a lessor to encourage a lessee to sign a lease. These can include:
Under ASC 842, lease incentives reduce the initial value of the ROU asset, rather than being recognized as income.
If a lessee receives a $10,000 incentive at the beginning of the lease, the initial journal entry would be:
Debit: ROU Asset – $90,000 (original lease value minus incentive)
Credit: Lease Liability – $100,000 (full lease obligation)
Debit: Cash – $10,000 (incentive received from lessor)
This ensures that the incentive reduces the ROU asset rather than being recognized as income.
If the incentive is received later in the lease term, it’s recorded as a negative lease payment:
Debit: Lease Liability – $10,000 (reducing the lease obligation)
Credit: Cash – $10,000 (incentive received from lessor)
This approach ensures that the lease liability reflects only the actual payments due over the lease term.
Lease incentives can provide significant financial relief, especially for organizations managing tight budgets.
Manual journal entry processes, with their reliance on spreadsheets and time-consuming calculations, only add to the burden of ASC 842 journal entries.
For many nonprofit, higher education, and healthcare teams, journal entries aren’t just a routine task; they’re a significant source of inefficiency and risk. When year-end audits come around, accounting teams often scramble to ensure accuracy while fielding auditor requests for detailed documentation.
But what if journal entries weren’t a time-consuming, error-prone process?
DebtBook eliminates the manual work and guesswork in lease journal entries. With its automated journal entry exports, accounting teams can:
Instead of spending valuable time compiling journal entries, DebtBook automates the entire process, allowing accounting teams to focus on reviewing and analyzing financial data rather than manually entering it.
See how DebtBook can transform your lease accounting process.
Disclaimer: DebtBook does not provide professional services or advice. DebtBook has prepared these materials for general informational and educational purposes, which means we have not tailored the information to your specific circumstances. Please consult your professional advisors before taking action based on any information in these materials. Any use of this information is solely at your own risk.