NetLessor - Reason Behind Clearing Accounts
Overview
The purpose of this article is to explain the use of the different recommended clearing accounts in NetLessor.
Lease Capitalized Costs or Prepay Clearing Account
Initial capitalized costs and prepayments are processed through this clearing account. These amounts are then cleared through the initial balance entries.
Operating Leases
Initial Direct Costs
Values entered here will be capitalized and then amortized over the lease term.
The first entry in the system will be a native NetSuite transaction to record these costs:
Debit: Lease Capitalized Costs or Prepay Clearing Account
Credit: Cash
This balance will remain in the clearing account until the lease is ready to commence. The initial balance journal entry will then reverse the Lease Capitalized Costs or Prepay Clearing Account with an entry like the following:
Debit: Capitalized Initial Direct Costs B/S Account
Credit: Lease Capitalized Costs or Prepay Clearing Account
Prepaid Lease Payments
Values input here represent deferred revenue that will get recognized on a straight-line basis over the life of the lease.
The first entry in the system will be a native NetSuite transaction to record the prepayment:
Debit: Cash
Credit: Lease Capitalized Costs or Prepay Clearing Account
This balance will remain in the clearing account until the lease is ready to commence. The initial balance journal entry will then reverse the Lease Capitalized Costs or Prepay Clearing Account with an entry like the following:
Debit: Lease Capitalized Costs or Prepay Clearing Account
Credit: Deferred Rent Receivable/Deposit Liability Account
Sales-Type/Direct Financing Leases
Initial Direct Costs
Values entered here represent deferred costs. These costs will increase the Net Investment in Lease amount as part of the initial balance entry and will subsequently be amortized over the lease term.
The first entry in the system will be a native NetSuite transaction to record these costs:
Debit: Lease Capitalized Costs or Prepay Clearing Account
Credit: Cash
Note that the above entry applies only to direct financing leases and sales-type leases where the fair value of the leased asset equals its carrying amount. If the fair value of the leased asset differs from the carrying amount for a sales-type lease, the initial direct costs should be expensed immediately. In such cases, there is no need to code the initial transaction to the clearing account.
This balance will remain in the clearing account until the lease is ready to commence. The initial balance journal entry will then reverse the Lease Capitalized Costs or Prepay Clearing Account with an entry like the following:
Debit: Net Investment in Lease Account
Credit: Lease Capitalized Costs or Prepay Clearing Account
Prepaid Lease Payments
Values input here are included in the Net Investment in Lease and will impact the computation of the selling profit.
The first entry in the system will be a native NetSuite transaction to record the prepayment:
Debit: Cash
Credit: Lease Capitalized Costs or Prepay Clearing Account
This balance will remain in the clearing account until the lease is ready to commence. The initial balance journal entry will then reverse the Lease Capitalized Costs or Prepay Clearing Account with an entry like the following:
Debit: Lease Capitalized Costs or Prepay Clearing Account
Debit: Net Investment in Lease Account
Debit: Lease Selling Profit Account
Credit: Inventory/Fixed Asset Clearing Account
Inventory/Fixed Asset Clearing Account
The Inventory/Fixed Asset Clearing Account is used to remove the leased asset from inventory or fixed assets, and to recognize the net investment in lease for sales-type and direct financing leases.
For operating leases, ensure that the asset is recognized on your books properly so that it can be depreciated accordingly.
The first entry in the system will be a native NetSuite transaction to record the derecognition of the inventory/asset:
Debit: Inventory/Fixed Asset Clearing Account
Credit: Inventory/Fixed Asset Account
This balance will remain in the clearing account until the lease is ready to commence. The initial balance journal entry will then reverse the Inventory/Fixed Asset Clearing Account in an entry like the following:
Debit: Net Investment in Lease Account
Debit: Lease Selling Profit Account
Credit: Inventory/Fixed Asset Clearing Account
Lease Receivable Clearing Account
The Lease Receivable Clearing Account is used to record the payment amount associated with monthly invoices and amortization entries. By the end of each period, this account is expected to zero out.
Customer Invoice
When a customer invoice is created for a lease, the following general ledger (GL) impact should be recorded—regardless of the lease classification:
Debit: Cash/Accounts Receivable Account
Credit: Lease Receivable Clearing Account
Note that you can either do this via automated invoicing in NetLessor, or manually in NetSuite.
Monthly Amortization Entry
Conversely, the monthly amortization entry recorded by NetLessor will vary based on the lease classification:
Operating Leases
An entry like the following will be booked as part of the monthly amortization process:
Debit: Lease Receivable Clearing Account
Debit/Credit: Deferred Rent Receivable/Deposit Liability Account
Credit: Lease Revenue Account
Sales-Type/Direct Financing Leases
An entry like the following will be booked as part of the monthly amortization process:
Debit: Lease Receivable Clearing Account
Credit: Net Investment in Lease Account
Credit: Interest Income Account
Transition/Go-Live Entry Clearing Account
The Transition/Go-Live Entry Clearing Account is a one-time account used on the go-live date. It acts as a plug figure to establish your balance sheet amounts in NetLessor as of the go-live date and will be cleared out as you reverse your preexisting balances.
While the entries may vary based on the lease classification, the general process is similar:
Operating Leases
System-Generated Entry
As part of the go-live process, an entry like the following will be recorded:
Debit: Deferred Rent Receivable/Deposit Liability Account
Credit: Transition/Go-Live Entry Clearing Account
Manual Entry
Depending on previous accounting practices, the following journal entry may involve different accounts. Below is an example of an entry that could be booked to remove previously recorded lease information:
Debit: Transition/Go-Live Entry Clearing Account
Credit: Deferred Rent Receivable/Deposit Liability Account
Sales-Type/Direct Financing Leases
System-Generated Entry
As part of the go-live process, an entry like the following will be recorded:
Debit: Net Investment in Lease Account
Credit: Transition/Go-Live Entry Clearing Account
Manual Entry
Depending on previous accounting practices, the following journal entry may involve different accounts. Below is an example of an entry that could be booked to remove previously recorded lease information:
Debit: Transition/Go-Live Entry Clearing Account
Credit: Net Investment in Lease Account