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Dear Sir,
I have a question regarding finance lease. As long as depreciation of a leased asset is not equal to finance lease liability amortization, the asset is not equal to liabilities in the end of an year in finance lease part. Do I think in a right way and if yes, how this disbalance is reported in a balance sheet?
Thank you
“Do I think in a right way?”
No! Think of the double entry
The asset debit is matched by the liability credit on the occasion of signing the lease
But, thereafter, the two values could very well differ as you have indicated in your post
But we’re going down two separate routes here
The first is writing off the asset over its useful life (or lease term if shorter) by way of depreciation. So we are expensing that asset over the period of its use
The second element is the settlement of the liability and the double entry there (ignoring the interest aspect) is to reduce the liability and reduce the cash resources
The value of the asset would only ever be the same as the value of the finance lease liability by sheer coincidence after the initial entry
OK?
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