Thursday, September 30, 2004

Accounting systems are key
with Gina Bienkowski

Q. I am acquiring equipment on lease from a vendor. Does it matter whether I set up the lease on my balance sheet or just expense the lease payments I make each month?

A. The decision whether to capitalize a lease (include the equipment in your fixed assets on the balance sheet and the lease as a liability) or expense the payments depends on who retains ownership at the end of the lease. If you do, capitalize the lease. If you don’t, expense it. A good example of a lease that is expensed is the Pitney Bowes postage machine. No matter how long you have it, the machine is returned to Pitney Bowes.

Typically, when a provider acquires equipment from a vendor through a lease, the equipment transfers ownership to the provider at the end of the lease term. In this case, you should capitalize the equipment on your books. You do this by increasing your fixed assets by the cost of the equipment and setting up a Lease Payable for the same amount. Lease payments made each month are charged against lease payable (the principal amount) and interest expense.

Not capitalizing your assets can mask poor inventory controls. When an inventory count is low, but compares favorably to the balance sheet amount, even though the balance sheet excludes assets, there are no red flags to indicate problems such as employee theft and equipment not being picked up. If you book your leases properly and the inventory on the balance sheet is correct, then a low physical inventory will be an alert.

It’s not uncommon to have problems in the company, but using your accounting systems to find them early is the key!

Gina Bienkowski is V.P. of Ultimate Resource, specializing in mergers and acquisitions. She can be reached at 610-353-1321.