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Accounting Treatment in the Books of Lessee

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Last updated date: 16th Jul 2024
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Who is a Lessee?

A lessee is the one who rents the land or property from a lessor. In other words, this lessee is also known as the “tenant” and who holds specific obligations as is defined in the lease agreement and confirmed by the legal system. The lease agreement is a legal binding document for the lessee and the lessor, and if the lessee violates the terms then they could be expelled by law. While the transaction, recordings are made in the books of the lessee. We, in this section, will discuss the same accounting treatment that is being done in the books of the Lessee. 

Understanding the Concept

Lessee is the one who rents a property which may be required to follow certain restrictions and guidelines for using this property or the real estate business they are paying to enter and use the property. Suppose the property is a vehicle under a lease, the lessee is required to keep their usage within certain limits. The lessee is subjected to additional fees in the event that the mileage usage of the leased vehicle exceeds the agreed-upon limits in the lease contract. 

The leased vehicles are to be maintained by the lessee with regular service and upkeep throughout the term of the agreement. The conditions must be met as the vehicle is to be returned to the auto dealer at the end of the lease. The vehicle would then go on the market as a used car for the proceeds to sale. 

Key Points of The Concept

  • A lessee is a person who rents the land or property, like the vehicle. The person or entity is called the lessee who rents to the lessor. 

  • Generally, Lessees are required to adhere to the guidelines and restrictions while using the property, such as applying mileage limits on a leased vehicle. 

  • A lessee who is a tenant of the commercial or residential property faces different types of limitations and restrictions on their use of the space.

  • Both the lessees and lessors have respective rights and responsibilities related to the rental property.

Accounting Treatment in the Books of Lessee

  • When the Royalty is to be paid –

Royalty A/C …. Dr

Short Workings A/C … Dr

To Lessor A/C

(The payment is due in this regard)

  • For paying the Lessor 

Lessor A/C … Dr

To Bank A/C

(Amount Being paid)

  • For transferring the royalty

Trading/Profit and Loss A/c/ Manufacturing/ Production A/C … Dr

To Royalty A/C

(Amount being recorded in relevant account)

  • When short workings are recouped

Royalty A/C …. Dr

To Short Workings A/C

To lessor A/C

(Recoupment done)

  • For irrecoverable short workings

Trading/Profit and Loss A/c/ Manufacturing/ Production A/C … Dr

To Short Working A/C

(Being amount changed to relevant account)

Rights of Lessees

A lessee is the tenant of a commercial or residential property owner who may face quite a different type of restrictions for using their space. A commercial lessee is to be granted by using certain rights to remodel the property for suiting the best to the business which uses the space. This includes repainting of the walls, adding the signboards associated with the company’s brand, or installing new equipment which will be used during the course of business. A commercial lease is to specify the property that is to be returned to its original form when the tenancy terminates. 

Residential lessees are limited in the choices for repainting the space they would occupy as tenants. The lessee’s rights include the following:

  • The right to privacy standards.

  • The right to basic standards of the habitability such as water supply, electricity, and heat infusion.

  • The right to live in a space which complies with the local building codes.

FAQs on Accounting Treatment in the Books of Lessee

1. Who is a lessor?

A lessor is an asset’s owner that is leased, or rented, to another party, who is the lessee. Lessors and lessees enter into a legally binding contract, which is known as the lease agreement, the contract spells out the terms of their arrangement of the contract.

A lessor may be either an individual type or a legal entity. The agreement is that who he, she enters into with another party is binding on both the parties that the lessor and the lessee who spells out the rights and obligations of each other. In addition to the use of this property, the lessor grants special privileges to the lessee, such as the early termination of the lease or renewal of the unchanged terms, solely at his or her will.

2. What is a lease agreement?

A lease is a type of contract which outlines the terms under one party who agrees to rent the property that is owned by another party. This guarantees the lessee, who is also known as the tenant, on the use of an asset and guarantees the lessor, or the property owner or the landlord, for regular payments for a specific period in exchange. The lessee and the lessor face the consequences if they fail to uphold the terms of the contract. This is a form of incorporeal right.  

3. What is a Real Estate Business?

A real estate business is a type of business entity which deals with the buying, selling, managing or investment of the real estate properties. According to The Balance – the property, land, buildings, air rights and above the land and underground the rights below the land are all included.