Final answer:
An operating lease for a lessor involves recognizing the lease asset on the balance sheet, recording revenue over the lease term, and continuing to depreciate the asset.
Step-by-step explanation:
Understanding Operating Leases in Accounting
An operating lease is a common business arrangement used to use assets without owning them. Here's how the lessor, the owner of the asset, records the transactions related to an operating lease:
Initial Entries
When a lessor enters into an operating lease, the initial entry is to recognize the leased asset on their balance sheet. No lease receivable is recorded as it is not a finance lease.
Revenue Recognition
Revenue is recognized on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished. At each accounting period, the lessor records lease income.
Recording Depreciation
The lessor continues to depreciate the leased asset over its useful life, according to their depreciation policy, as the lessor retains ownership of the asset.
Note that in practice, additional entries for the receipt of lease payments, income taxes, and potential impairments might also be relevant.