Accounting for vehicle lease

oscarBravo

Hi guys,

I'm trying to figure out how to account for a van lease in my company's accounts. I "bought" the van under a leasing arrangement, where the leasing company wrote the cheque for the van, and I pay a fixed monthly repayment.

I've seen a suggestion that the van should be regarded as a fixed asset and the total lease amount as a current liability (creditor), and that the monthly payment is an expense that reduces the current liability. I can see how that works as a double-entry exercise, but is it accurate to show a vehicle as a fixed asset when I don't technically own it?

Ta for any input.

Kinetic^

Yes. You can show a leased vehicle as an asset in your accounts providing you'll own it at the end of the lease.

Underneath you're fixed asset note in your accounts you've to show the Net Book Value of the leased asset for the current and prior year.

That's it in simple terms...........Kluivert, your turn, don't confuse him though

oscarBravo

Kenny 5 wrote:

Yes. You can show a leased vehicle as an asset in your accounts providing you'll own it at the end of the lease.

Cool, ta.

Kenny 5 wrote:

Underneath you're fixed asset note in your accounts you've to show the Net Book Value of the leased asset for the current and prior year.

...and write the difference off as an expense in the depreciation account at year-end?

Kenny 5 wrote:

That's it in simple terms...........Kluivert, your turn, don't confuse him though

Heh. I'm not all that easily confused - I was a certified SAP FI/CO consultant back in 1996 - but I'm not always completely up to speed on current best practice.

Kinetic^

Well you'll have a fixed depreciation rate every year...........whether you choose straight line or reducing balance is really up to you.

smcgiff

oscarBravo wrote:

I can see how that works as a double-entry exercise, but is it accurate to show a vehicle as a fixed asset when I don't technically own it?

Substance over form - It's a principle in accounting that allows/expects (unless for good reason) for the actual substance of the transaction to take precedence over the strict legal position. Remember, the law's an ass!

Kenny you're getting slack!

kluivert

Kenny 5 wrote:

That's it in simple terms...........Kluivert, your turn, don't confuse him though

Leasing is my specialised area.

Oscar I am going to explain this by means of double entry, This is also relative if you are vat registered.

**Note: Vat rule for leases.

You cannot claim the vat back at once with a lease, you must claim the vat back with each repayment over the life of the lease agreement.

You can claim the vat back at once with a hire purchase.

This is why it is very important to establish first if it is a lease agreement or hire purchase agreement.

1. Van costs €20,000 (net) + €4200 (Vat) = €24200 (Gross).
2. Set up a motor Vehicles nominal under tangible fixed assets.
3. Set up a "(Name of leasing company) lease account no. *****" under Current liabilities (or none known as "Amounts due within 1 year").

Step 1: Showing the addition of the van in your balance sheet.

DB: Motor Vehicles with €20000 (Balance Sheet)
CR: Lease Account with €20000 (Balance Sheet)

Step 2: Showing the repayments of the van from your bank account. Say repayments are €605 a month including vat. €500 net + €105 vat.

DB: Lease Account with €605 (Balance Sheet)
CR: Bank Account with €605 - the monthly repayment. (Balance Sheet)

Step 3: Showing the reclaim of Vat on the monthly repayments.

DB: Vat Account with €105 (Balance Sheet)
CR: Lease Account with €105 (Balance Sheet)

Note in step 2 you DB the lease account with €605 and in step 3 you CR the lease account with €105 to give a net figure of €500.

Your Lease Account in your balance sheet should look like this:

CR: Additions to motor vehicles €20000

DB: Repayments from Bank Account (€605*12 months) €7260
Cr: Vat on repayments (€105*12 months) €1260

Balance on Lease Account €14000


Step 3: Depreciating the Motor Vehicle.

1. Decide a depreciation policy - for motor vehicles we recommend "5 years at straigh line". This means that you are writing off 20% of the net cost every year for five years.

€20000x5 years = 4000 in depreciation a year.

DB: Deprecaition on Motor Vehicles with €4000 (Profit & Loss Account)
CR: Motor Vehicles with €4000 (Balance Sheet)

After the first year your Motor Vehicles Account in your balance sheet should look like this:

DB: Additions to motor vehicles €20000
CR: Depr on Motor Vehicles (Year 1) €4000

Net Book value after year 1 is €16000.

If you need any other help give me a buzz.

oscarBravo

Crystal clear, kluivert - thanks. It's deffo a lease, as I'm paying the VAT on the monthly payments.

K-9

Hi Guys. Just thinking u would need to allow for the Lease Charges as well. Otherwise the repayments at the end of the lease would actually be higher than the cost of the Van. E.g. €7,260 per annum * 4 years would be €29,040. VAT of €5,040 would leave €24,000 paid Net into the Lease Account but the Van only cost €20,000 leaving a Dr. Balance of €4,000 in the final year.

Oscar, U would need to apportion the extra amount (€4,000) i.e. Lease Charges over the term of the lease(4 years). That is €1,000 per year so you would need to Debit a Leasing Charge Expense A/c in the P&L and Credit your Lease A/c as well with €1,000 each year. At the end of the 4 years the full €24,000 Net of VAT would be wrote off.

After Year 1 the balances would be the same as Kluivert outlined except the Lease Account would now be €15,000 with a Leasing Charge in the P&L of €1,000 to offset that.

At the end of the year there would be 3 years left so the Current Liability would be €5,000 and the Long Term Liability €10,000.

The Current Liability is the €605 * 12 = €7,260.
Less VAT €105 * 12 = €1,260.
Less Lease Charges = €1,000.
€5,000

kluivert

Seanies32 wrote:

Hi Guys. Just thinking u would need to allow for the Lease Charges as well.

I knew I forgot something there as well. How could I forget the interest, thanks Sean.

Its much easier when use T Accounts.

Double Entry for Lease Charges (or interest)

DB: Lease Charges (Profit and Loss Account)
CR: Lease Account (Balance Sheet)

Kinetic^

smcgiff wrote:

Kenny you're getting slack!

It was late dude........I was trying to watch TV while helping the person out :cool:

loodles

I have two questions on the above

1) Do you not have to depreciate the asset over the lease term (if shorter than the useful life?)

2) Can you claim the VAT back on vehices?