What is an Account Type?

Account types refer to the classification of financial accounts that represent different aspects of a company's financial position and performance. They are classified as Balance Sheet or Income Statement. The Account Type selected for an account will impact how the Trial Balance of the account is calculated.

This guide outlines the key balance sheet and income statement accounts affected by ASC 842 for lessees.

1. Balance Sheet Accounts under ASC 842

ASC 842 requires lessees to recognize both an asset and a liability for all leases with terms longer than 12 months. Within the Trial Balance report, balance sheet account types will present all transactions through the end date selected. The following are the primary accounts:

A. Right-of-Use (ROU) Asset

What It Is: This represents the lessee's right to use the leased asset over the lease term.
How It’s Measured: Initially measured at the present value of future lease payments, adjusted for lease incentives received, prepaid rent, and initial direct costs.
Account Classification:
- For operating leases: Non-current asset.
- For finance leases: Classified similarly to property, plant, and equipment.

B. Lease Liability

What It Is: This represents the lessee’s obligation to make lease payments.
How It’s Measured: Initially measured at the present value of future lease payments.
Account Classification:
- Current Portion: Portion of lease payments due within the next 12 months.
- Non-Current Portion: Remaining portion of the liability due beyond 12 months.

C. Deferred Rent:

What It Is: Under ASC 842, deferred rent arises when there is a difference between the straight-line lease expense and actual cash payments made (in operating leases). This can occur due to rent holidays, escalating lease payments, or other lease incentives.
Where It Appears:
- Balance Sheet: Reported as a liability under current or non-current liabilities, depending on the timing of the deferred amount.

D. Cash/Suspense Account:

What It Is: This is used temporarily to hold cash or pending payments for leases. Any lease payments made but not yet allocated to a specific lease liability or cleared can be held in this account.
Where It Appears:
- Balance Sheet: Classified as a current asset since it involves funds that will be applied shortly to lease liabilities or other payments.

2. Income Statement Accounts under ASC 842

ASC 842 impacts the income statement based on the lease classification: operating leases and finance leases (previously called capital leases). Within the Trial Balance report, income statement account types will only present the transactions that occurred during the period selected.

A. Operating Lease Expense

What It Is: The lease cost is recognized as a single expense over the lease term on a straight-line basis.
Where It Appears: Operating expense, typically in the "Rent/Lease Expense" line.

B. Finance Lease Expenses

For finance leases, the expense is split into two parts:
1. Amortization of the ROU Asset:
  - What It Is: The ROU asset is amortized (similar to depreciation) over the lease term.
  - Where It Appears: Presented as amortization expense on the income statement.
2. Interest Expense on Lease Liability:
  - What It Is: Interest is recognized on the lease liability based on the effective interest method.
  - Where It Appears: Recorded separately in interest expense.

C. Variable Lease Expenses

What It Is: These are lease payments that are not fixed, such as payments based on usage or sales.
Where It Appears: These costs are expensed as incurred, typically in the operating expenses section.

D. Short-Term Lease Expenses

What It Is: Leases with terms of 12 months or less are expensed on a straight-line basis.
Where It Appears: Typically reported in operating expenses under lease or rent expense.

ASC 842 Accounts

Account Name	Balance Sheet / Income Statement	Type	Classification
Right-of-Use (ROU) Asset	Balance Sheet	Asset	Non-current asset (Operating/Finance)
Lease Liability (Current)	Balance Sheet	Liability	Current Liability
Lease Liability (Non-Current)	Balance Sheet	Liability	Non-Current Liability
Deferred Rent	Balance Sheet	Liability	Non-Current Liability
Cash/Suspense Account	Balance Sheet	Asset	Current Asset
Operating Lease Expense	Income Statement	Operating Expense	Operating expenses
Amortization of ROU Asset	Income Statement	Amortization Expense	Operating expenses
Interest Expense on Lease	Income Statement	Interest Expense	Non-operating expenses
Variable Lease Expense	Income Statement	Variable Operating Expense	Operating expenses
Short-Term Lease Expense	Income Statement	Operating Expense	Operating expenses

Under ASC 842, lessees must now recognize most leases on their balance sheets, introducing the Right-of-Use Asset and Lease Liability. On the income statement, operating leases continue to be reported as a single expense, while finance leases separate costs between amortization and interest expense. This enhances transparency and gives a clearer view of a company's lease obligations.