Leases represent numerous technical computations and calculations under accounting principles. Leaseholds are closely related to traditional leases. Accountants must properly account for these items on a company’s balance sheet. Different parts of the transaction will tip off accountants about how to record leaseholds, which are a fixed, tangible asset.
A leasehold is typically the right to use or hold a property or another asset. Both parties use a written contract to agree upon the amount of time and cost of the item in the leasehold. As with most leases, a transfer of ownership does not occur. The lessor retains ownership while giving the lessee the ability to use the item listed in the contract.
Companies must record a leasehold as a fixed asset. This guideline comes from generally accepted accounting principles. On the balance sheet, accountants can place a separate line under the long-term fixed assets called leaseholds. The historical cost is often the basis for reporting purposes.
Accountants must typically record monthly journal entries to account for the use of leaseholds. A common entry will debit an expense account and credit the leasehold account. This reduces the leasehold’s value and accurately represents the use of leaseholds by a company. Other entries may be necessary based on the specific agreement between the lessor and lessee.
Leaseholds represent a company’s ability to use an item for a long period. This allows the business the opportunity to leverage the asset into profits through benefits gained from the asset. These two definitions are what make leaseholds a long-term, tangible fixed asset. Stakeholders need information on the items companies can use for several periods during their operational lifetimes.