When accounting for operating leases accountants generally
follow the legal form of the transaction: payments for the hire of
an asset.
Generally accepted accounting practice treats the lessor as
the owner of the asset, and not the lessee. The lessor shows the
asset in the balance sheet and recognises the gross rentals as
income. The lessee recognises the gross rentals paid as lease
rental expenses.
Therefore an operating lessor shows the leased asset on its
balance sheet as a fixed capital asset and depreciates it in the
normal way. All the rentals receivable are recognised as income,
usually on a straight line basis over the term of the lease. This
means adding up all the rents for the entire period of the lease
and spreading them evenly over the whole period.
Similarly, an operating lessee’s rentals are charged to
the profit and loss account, usually over the term of the lease and
on a straight line basis.
Further guidance on accounting for operating leases is at
BLM12000.
