Before You Start

This guide assumes familiarity with current lease accounting standards (ASC 842/IFRS 16), fixed asset recognition, and long-term liabilities.

Overview

35 min
Setup Time
Advanced
Difficulty
Quarterly
Maintenance

What You’ll Learn

  • Distinguish between operating and capital leases
  • Understand the impact of ASC 842 on POS leases
  • Account for purchased POS systems as fixed assets
  • Properly record lease assets and liabilities
  • Calculate and record depreciation/amortization

1. Preparation Steps

Ensure your chart of accounts includes the following for accurate POS system accounting:

Required Accounts

  • Fixed Assets - POS Equipment (Asset)
  • Accumulated Depreciation - POS Equipment (Contra-Asset)
  • Lease Liability - Short-Term (Liability)
  • Lease Liability - Long-Term (Liability)

Optional (but recommended)

  • Right-of-Use (ROU) Asset - POS (Asset)
  • Amortization Expense - ROU Asset (Expense)
  • Lease Interest Expense (Expense)

2. Lease vs. Purchase: The Accounting Impact

The way you acquire your POS system significantly impacts your financial statements.

Capital Lease (Finance Lease under ASC 842)

When the lease effectively transfers ownership to the lessee.

Pros:
  • Assets and liabilities on balance sheet.
  • Depreciation expense recognized.
  • Interest expense separated.
Cons:
  • More complex accounting.
  • Increases debt ratios.
  • Impacts key financial metrics.

Operating Lease

For leases that do not meet the criteria of a finance lease.

Pros:
  • Historically off-balance sheet (pre-ASC 842).
  • Straight-line lease expense.
  • Simpler for short-term, low-value assets.
Cons:
  • Still requires ROU asset & liability (post-ASC 842).
  • Can be less transparent than ownership.
  • Does not build equity.

Expert Tip: Under ASC 842, all leases (except short-term ones) are now recognized on the balance sheet. The distinction between capital and operating leases primarily impacts the income statement and cash flow classification.

3. Accounting for Purchased POS Systems

When you purchase a POS system outright, it’s treated as a fixed asset.

Here is a sample journal entry for a POS system purchase.

{
  "Date": "2025-01-01",
  "Journal_Entry": "Purchase of POS System",
  "Debit": {
    "Account": "Fixed Assets - POS Equipment",
    "Amount": 5000.00
  },
  "Credit": {
    "Account": "Cash / Accounts Payable",
    "Amount": 5000.00
  }
}

4. Step-by-Step: Accounting for Leases

Here is the high-level workflow for correctly accounting for POS leases under ASC 842.

  1. 1

    Determine Lease Classification

    Apply ASC 842 criteria to classify the lease as finance (capital) or operating. This dictates income statement treatment.

  2. 2

    Calculate Present Value

    Discount future lease payments to determine the initial Right-of-Use (ROU) asset and corresponding lease liability.

  3. 3

    Record Initial Entry

    Debit the ROU Asset account and Credit the Lease Liability account for the present value calculated.

  4. 4

    Record Lease Payments

    Each payment reduces the lease liability and includes an interest component (finance lease) or a combined lease expense (operating lease).

  5. 5

    Amortize ROU Asset

    For operating leases, amortize the ROU asset on a straight-line basis. For finance leases, amortize systematically over the lease term.

Common Error: Misclassifying Leases

Misclassifying a lease can lead to material misstatements on financial statements, impacting debt covenants and investor perception. Ensure all criteria are carefully applied.

5. Review and Reconciliation

Quarterly Review Checklist

  • Review lease schedules for accuracy and changes
  • Reconcile ROU asset and lease liability balances
  • Confirm depreciation/amortization entries
  • Verify proper income statement classification of expenses

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