What appears in the P&L for an operating lease?

A single straight-line lease cost in operating expenses. The interest and the asset amortization exist only inside the balance-sheet entries; the P&L sees one level figure, unlike a finance lease.

Which discount rate do I use?

The rate implicit in the lease if it can be determined, which it rarely can; otherwise the incremental borrowing rate. Private companies may elect a risk-free rate instead.

Journal entry for an operating lease under ASC 842

At commencement, debit Right-of-use asset and credit Lease liability for the present value of the payments. Each payment debits Lease liability and credits Cash; each month-end debits Operating lease cost for the straight-line cost and credits Lease liability for the interest and the right-of-use asset for the rest.

Lease liability at commencement: $325,753.85
Monthly lease cost: $10,000
Total interest inside the payments: $34,246.15
Entity: Illustrative company
Basis: Accrual
Currency: USD
Period: January 2026

The worked example

A company signs a 36-month office lease at $10,000 a month, paid in advance, discounted at a 7% incremental borrowing rate. The present value of the payments, $325,753.85, is both the liability and the right-of-use asset; the P&L carries $10,000 a month.

Transaction · January 1, 2026

JE-11 Jan 2026Manualposted

Recognize the lease at commencement.

Journal entry JE-1, 2 lines
Account	Debit	Credit
1600 Right-of-use asset	325,753 US Dollar and 85 cents
2600 Lease liability		325,753 US Dollar and 85 cents

Totals	325,753 US Dollar and 85 cents	325,753 US Dollar and 85 cents

Balanced.

Transaction · January 1, 2026

JE-21 Jan 2026Manualposted

Pay the first month in advance.

Journal entry JE-2, 2 lines
Account	Debit	Credit
2600 Lease liability	10,000 US Dollar
1000 Cash		10,000 US Dollar

Totals	10,000 US Dollar	10,000 US Dollar

Balanced.

Adjusting entry · January 31, 2026

JE-331 Jan 2026Adjustingposted

Recognize January's straight-line lease cost.

Journal entry JE-3, 3 lines
Account	Debit	Credit
6110 Operating lease cost	10,000 US Dollar
2600 Lease liability		1,841 US Dollar and 90 cents
1600 Right-of-use asset		8,158 US Dollar and 10 cents

Totals	10,000 US Dollar	10,000 US Dollar

Balanced.

Operating lease, first twelve months

Computed by the same tested function the toolbelt runs. The last period absorbs any rounding, so the schedule sums to the cent.

Operating lease, first twelve months
Month	Lease cost	Interest	ROU amortization	Liability
Jan 2026	10,000.00	1,841.90	8,158.10	317,595.75
Feb 2026	10,000.00	1,794.31	8,205.69	309,390.06
Mar 2026	10,000.00	1,746.44	8,253.56	301,136.50
Apr 2026	10,000.00	1,698.30	8,301.70	292,834.80
May 2026	10,000.00	1,649.87	8,350.13	284,484.67
Jun 2026	10,000.00	1,601.16	8,398.84	276,085.83
Jul 2026	10,000.00	1,552.17	8,447.83	267,638.00
Aug 2026	10,000.00	1,502.89	8,497.11	259,140.89
Sep 2026	10,000.00	1,453.32	8,546.68	250,594.21
Oct 2026	10,000.00	1,403.47	8,596.53	241,997.68
Nov 2026	10,000.00	1,353.32	8,646.68	233,351.00
Dec 2026	10,000.00	1,302.88	8,697.12	224,653.88

What the entries do to the accounts

Every entry above posted to the ledger, starting from zero balances: the net debit or credit each account is left with. Debits equal credits, so the books still balance.

Net movement by account
Account	Debit	Credit
1000 Cash		10,000 US Dollar
1600 Right-of-use asset	317,595 US Dollar and 75 cents
2600 Lease liability		317,595 US Dollar and 75 cents
6110 Operating lease cost	10,000 US Dollar

Totals	327,595 US Dollar and 75 cents	327,595 US Dollar and 75 cents

Why it is booked this way

Under ASC 842 a lease longer than twelve months is a right to use an asset financed by an obligation to pay for it. Both go on the balance sheet at the present value of the payments.

For an operating lease the P&L shows one straight-line cost. Behind it the liability accretes interest and is paid down, and the right-of-use asset is amortized by whatever amount keeps the total cost level — which is why the month-end entry has a plug-like credit to the asset.

Common mistakes

Expensing rent as paid and leaving a multi-year office lease off the balance sheet.
Booking an operating lease with interest and amortization lines in the P&L, as if it were a finance lease.
Discounting at an arbitrary rate with no support for the incremental borrowing rate.

Questions

What appears in the P&L for an operating lease?: A single straight-line lease cost in operating expenses. The interest and the asset amortization exist only inside the balance-sheet entries; the P&L sees one level figure, unlike a finance lease.
Which discount rate do I use?: The rate implicit in the lease if it can be determined, which it rarely can; otherwise the incremental borrowing rate. Private companies may elect a risk-free rate instead.

Terms on this page

Work with this entry

The tool that computes the schedule, the concept behind it, the entries that come next and the components that render them.

An illustrative company, not anyone’s real books. Every figure on this page is computed from the inputs in the example and posted by the same functions as the journal entry balancer. General information for US companies under US GAAP, not accounting or tax advice.

The worked example

Operating lease, first twelve months

What the entries do to the accounts

Why it is booked this way

Common mistakes

Questions

Terms on this page

Work with this entry

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