Any lease other than the finance lease is called operating lease. In this type of lease, the lease rentals are charged to the income statement as an expense over the term of the lease.
Under operating lease, the ownership of the asset remains in the custody of the leased asset provider and never transferred to the lessee even after the expiry of the lease term. Not just that, the lease term is quite short considering the useful life of the asset.
Journal Entry
| Description | Debit | Credit |
| In order to record periodical lease charges: | ||
| Operating lease charges | xxx | |
| Accrued lease charges | xxx | |
| In order to record payment of the operating lease: | ||
| Accrued lease charges | xxx | |
| Bank | xxx | |
| In order to record the cash back given usually at the inception of the operating lease: | ||
| Bank | xxx | |
| Deferred Income | xxx | |
| Operating lease charges | xxx | |
| Deferred income (periodic portion of deferred income) | xxx | |
| Bank | xxx | |