Lease Accounting Made Simple: 4 Easy Steps To Calculate Your Lease Rate
Leases are very important documents that establish a contract agreement between an owner and a renter for a set period of time. Sometimes leases are short, while other times they can be quite extended. Some lease agreements even ultimately allow the renter to purchase the property under clearly established terms over a specified amount of time. Lease accounting is regulated in the US by the Financial Account Standards Board, which is colloquially referred to as FASB. Below are some easy ways that you can calculate your lease rate.
Step #1: Determine the Total Amount of Out-of-Pocket Costs
Multiply the term of your lease agreement by the payment on the lease that's made each month. In other words, to figure out the total amount of the out-of-pocket costs, you will need to multiply the number of months that the property, vehicle, or other item will be leased by the monthly payment that is agreed upon in the rental agreement.
Step #2: Establish the Total Finance Charge
You can determine the total finance change of your lease agreement by subtracting the amount of money that has been financed from the total amount of out-of-pocket costs that you determined in Step 1.
Step #3: Figure Out the Yearly Finance Charge
That brings us to a complex part of lease accounting. To determine what your annual finance charge will be, first take the total finance charge figure from Step #2. Then, divide it by the term (the number of years).
Step #4: Determine the Annual Lease Rate
Alright, now to get the final figure in this puzzle, you can get the annual lease rate by dividing the yearly finance charge figure from Step #3 by the financed amount. There you should have your annual lease rate.
Pro Tip: Don't forget that a security deposit is also an important mercenary part of lease agreements. If the tenant damages or otherwise violates the term of their rental agreement, landlords will be able to keep the security deposit. The rules are usually created to benefit the landlords.
Finally, keep in mind that lease accounting is best left to the professionals. While it is good to educate yourself as much as you can on the standards and laws of lease accounting, protect your business and your own financial health by relying on professionals to make sure that all is up to the standards of the Financial Account Standards Board and beyond.