Operating lease is a lease which does not involve a transfer of risks and rewards of ownership of the leased asset to the lessee. Operating leases normally have a term which is significantly shorter than the useful life of the leased asset and the present value of lease rentals is significantly less than the fair value of the leased asset.
It is a lease which does not meet the recognition criteria of capital lease (i.e. finance lease).
The general entries of operating lease in lessee's books will be;
Year 1
Lease Rental Payment (Dr)
Bank (Cr)
Accrued Lease Rentals (Cr)
Year 2
Lease Rental Expense (Dr)
Accrued Lease Rentals (Dr)
Bank (Cr)
