How to Account for Leasehold Improvements

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From new flooring to paint, the cost of preparing a leased building for opening day can be high. It would appear that you are fixing up the building for the property owner. However, these purchases are your assets, at least during the term of your lease. So how do you account for these items in your accounting records?

Some basic familiarity with your accounting software and accounting principles is necessary to complete this task. With that knowledge, it will be simple if you follow these steps.

Things You'll Need

• Receipts of your purchases for the leasehold improvement
• Your accounting records

Instructions

1. Create a new asset on your balance sheet called leasehold improvements. Along with this new asset, you will create a contra account called leasehold improvements depreciation to track how much your new asset depreciates. Review your accounting software program's instructions for adding new accounts.

2. Total all the associated costs for the improvement. For instance, if you replaced the carpet and added a new wall, the cost of the carpet, paint, sheet-rock, lumber and the labor for the installation would all be included in the cost of this improvement.

3. Record the total cost in your accounting records. The method of doing this will depend on the type of accounting software you have. The transaction is a debit to the new asset account you have created and a credit to your checking or credit card account. If you used a loan to pay for your purchases, then the credit would be this new loan.

   Some accounting programs will display a check for you when entering a purchase. If this is the case, fill in the check and use your new asset account when it asks for the expense. You are really recording an asset, not an expense.

4. Your new asset will remain on your balance sheet until year-end, when you will expense a portion of it as a depreciation expense. To determine the amount to depreciate, ask the Internal Revenue Service for the current classification of leasehold improvement property, as this is subject to change.

   To record depreciation, debit a depreciation expense account and credit your new leasehold improvements depreciation account. Doing it in this manner leaves the original cost of the improvements and allows you to track the amount you expense separately.

Tips & Warnings

• Keep all your receipts for your improvement together. It will make it easy to substantiate the cost should the IRS ask. After making your entries, create a balance sheet and income statement to verify that your entries had the desired result.

References

• Publication 946 How to Depreciate Property
• 2009 GAAP Guide Level A; Jan R. Williamsc, Joseph V. Carello, Terry L. Neal. October 2008.

Resources

• Tax Alamanac