When the lease qualifies as an operating lease, what is the initial journal entry for the lessee?

When a lease qualifies as an operating lease, the initial journal entry reflects the recognition of a right-of-use (ROU) asset and a lease liability. The lessee does not initially record the lease expense in the same way as a direct expense; instead, they establish both an asset and liability.

The ROU asset is recognized because the lessee has the right to use the leased asset over the term of the lease, and the lease liability reflects the obligation to make lease payments. Initially, both the ROU asset and the lease liability are recorded at the present value of the future lease payments. This approach is aligned with the accounting standard that governs leases, which is ASC 842 in the U.S.

Therefore, the correct entry captures the financial position of the lessee accurately by debiting ROU Asset to reflect the new asset on the balance sheet, while simultaneously crediting Lease Liability to indicate the obligation to pay for the use of that asset. This dual recognition helps in the correct presentation of the financials and maintains transparency in reporting.

In an operating lease, unlike a financing lease, the lessee does not recognize a corresponding immediate expense or decrease in cash position upon initial recognition; instead, lease payments are expensed over the lease term