Interest on Lease Liabilities
The finance charge part of each lease payment on long leases, on the Profit and Loss statement. The rest of the payment reduces the lease liability.
In detail
Under NFRS 16 a long lease is treated like a loan used to buy the right to use the premises, so each payment carries an interest element. The interest for the month is the opening lease liability times the discount rate divided by twelve; it is debited here while the rest of the payment reduces Lease Liabilities - Current. Over the lease the interest share falls as the liability shrinks. Together with Depreciation - Right-of-Use Assets this replaces the rent expense a short lease would show. The IRD still allows the actual rent paid, so the auditor reconciles book and tax figures. A company that expenses rent through Office Rent does not use this ledger at all.
Formula
Monthly lease interest = Opening lease liability x Discount rate / 12
Accounting entry
| Account | Debit | Credit |
|---|---|---|
| Interest on Lease Liabilities | Rs 6,750 | |
| Lease Liabilities - Current | Rs 18,250 | |
| Bank Account | Rs 25,000 |
How to record it in BRAccount
- 01Take the interest and principal split for the month from the lease schedule.
- 02Go to Invoicing > Journal Entry > New dated the payment.
- 03Debit Interest on Lease Liabilities for the interest and Lease Liabilities - Current for the principal.
- 04Credit the bank account for the payment.
- 05Submit. The entry below posts.
- 06Deduct TDS at 10 percent on the gross rent if the lessor is a resident landlord, crediting TDS Payable.
When to use it
Post by Journal Entry monthly from the lease schedule, splitting each rent payment between interest and principal.
Example from the demo books
Dr Interest on Lease Liabilities Rs 6,750, Dr Lease Liabilities - Current Rs 18,250, Cr Bank Account Rs 25,000 for the Shrawan lease payment.