In this lesson, we are going to demonstrate how to book a capital lease versus an operating lease. First, let's focus on the capital lease. We have a leased two hard drive destruction Machines from Drive Drill. We need to get those on the balance sheet actually as a fixed asset because capital leases are booked very similar to a purchase of equipment. Let's add the two fixed asset accounts that will track the value of our two hard drive destruction machines. The first thing I'm going to do is click "New" on the chart of accounts and we're going to choose "Fixed asset," and the detail type is tools and equipment. I'm going to name this one hard drive destruction number 1, and if helps if you spell it right, but that's what this is for. You know what? I'm going to copy that because I'm going to do another fixed asset account to represent the next one. "Save and New," let's do another one. In this case, this is the new screen. I've actually not saved this and I'm going to just paste that in and change the number, and "Save and Close." Let's get back out to the chart of accounts and look for our fixed assets area. Here are my two hard drive destruction fixed assets. I like to look at the chart of accounts the way the client has it setup now and see if I would change anything. You can see here, the truck has actually different structure here. They have a truck and then the sub-accounts. What I'm going to do is put shredder as my inherent account and put these two hard drive destruction machines underneath that. Let me go ahead and add a new fixed asset account to work as that carrying account. What that does is help total all of this shredding equipment together. Then I'm going to save that. I'll go back and edit my two pieces of equipment, and I'm going to make this a sub of shredders. Started typing it, brought it up. Let's go fix the second one. Edit this one. Sub-account of shredders. Now, I'm tracking those together. What's nice about this is on the balance sheet, I'll be able to get a total for both shredders and their value. It's allowing me to have subtotals on that balance sheet. That's the value of it, but when you do a capital lease, we have to offset the lease itself to a liability account. What I'm going to do is set up a shredder capital lease liability. I'm going to go back up to the top, and this case, it is a long-term liability. We'll leave that as notes payable, and I'll do shredder, capital lease liability. I will save and close that. Now, I have a liability account to offset the value of the lease is two. Next step is the journal entry, the value of these two machines that we are leasing, and I'm going to go ahead and do a journal entry to represent that, right here. Each one according to the contract has a value of $11,250. I'm going to type in HD and bring in my very first shredder, debit that for 11,250, a hard drive shredder. Then the next one, I could type it in or scroll down. I prefer just typing it in and the same lease value, and that is my debit column. The credit would go to my shredder capital lease liability account. Again, debits equal credits. I can't save it unless they do. Let me save and close that for you. We'll go back to our chart of accounts, take a look at the value of our shredders. Two shredders each individually 11,250, total value of both traders we are leasing is 22,500. If I scroll down a little bit to my long-term liabilities, here's my shredder liability. As we make payments on this lease, this liability will start reducing out. That is a capital lease. Again, it is more like purchasing in a way, it's booked almost identical the same. With an operating lease, it's completely different. We don't even have to worry about the balance sheet at all, except for the fact that maybe cash is leaving the bank and it's going to lease expense. This one is really simple. I'm just going to go ahead and do a journal entry. I already have a bank account and I already have a lease expense. Let's go do that journal entry. Let's say our first payment on the next lease is coming out of the checking account. This lease is actually for a baler that will bale paper. The lease is for $115 thousand and it's going to go over 12 months. Basically, what we're going to do is divide 115 by 12. It could be on the contracts that there might be some interest involved in there, so make sure you do look at the contract and see if there's any interest expense as well. Let's go ahead and we're going to credit the checking account. What I'm going to do is use a formula right here in QuickBooks Online, 115,000, and I'm hitting the backslash for divide, divided by 12. That is what I'm assuming right now is the monthly lease, this will be without interest. If there's interest. Involved, obviously, this payment is going to be a little bit more. We're going to credit the checking account and then debit lease equipment, rent or lease. This is an expense account, as you can see on the profit and loss statement. We're just going to write that off. Double-check there is no interest involve. D if this payment is for more than that, then it probably is, and you want to maybe do a second row here for the interest expenses as well. That is basically how to do an operational lease. You don't have to set anything up really, just lease expense and have the money come out of the bank account.
