BLM15620 - Lease accounting: finance lease accounting: finance lessees: example 2: The accounting entries
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
The content of this page has been updated and transferred to BLM15605. This page will be archived at the end of February 2026.
Using the effective interest method for the lease in the example described at BLM15605 onwards, an effective interest of 8.35% can be calculated and this results in interest as shown in the table below:
Year |
Balance b/f (£) |
Interest Charge (£) |
Rent Paid (£) |
Balance c/f (£) |
|---|---|---|---|---|
1 |
50,000 |
4,175 |
1,000 |
53,175 |
2 |
53,175 |
4,440 |
1,000 |
56,615 |
3 |
56,615 |
4,727 |
1,000 |
60,342 |
4 |
60,342 |
5,038 |
34,000 |
31,380 |
5 |
31,380 |
2,620 |
34,000 |
nil |
In Example 2, the accounting entries would then be:
Balance Sheet at End |
Year 1 (£) |
Year 2 (£) |
Year 3 (£) |
Year 4 (£) |
Year 5 (£) |
|---|---|---|---|---|---|
Assets |
|||||
Leased Asset |
50,000 |
50,000 |
50,000 |
50,000 |
50,000 |
Depreciation |
(2,500) |
(5,000) |
(7,500) |
(10,000) |
(12,500) |
Net |
47,500 |
45,000 |
42,500 |
40,000 |
37,500 |
Liabilities |
|||||
Lease creditor |
50,000 |
53,175 |
56,615 |
60,342 |
31,380 |
Accrual/Repayment |
3,175 |
3,440 |
3,727 |
(28,962) |
(31,380) |
Net |
53,175 |
56,615 |
60,342 |
31,380 |
Nil |
Profit and Loss A/c |
|||||
Depreciation |
2,500 |
2,500 |
2,500 |
2,500 |
2,500 |
Finance Charges |
4,175 |
4,440 |
4,727 |
5,038 |
2,620 |