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When the lease payment is paid in advance, the current liability is the rent itself. But if lease payment is paid in arrear at the end of the year, the current liability is rent less finance charge(of next year).
why is this treatment different?-The instalment amount includes the finance cost(interest) also.
-Only Accrued interest is recorded in the accounts.In Advance
i.e, paid on the first day of the year. 1st instalment does not include the interest. At the end of 1st yr, interest for the year is accrued, thus, shown in the accounts. This is included in the 2nd yr instalment..Thus, the current liability is same as the instalment amount.In Arrears
i.e, paid on the last day of the yr. 1st yr instalment includes the interest for the yr. Now, current liability is 2nd yr instalment amount. But, this includes the interest for next yr, which is not yet accrued & so not to be shown in the accounts.Thus, we subtract the interest amount from the instalment amount to get the current liability.ok, najiya, very good. proud of you. you answered well. Hope that logic is correct.
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