Video narration
If your company rents an office for five years, is that just rent expense? Not just rent. Under ASC 842, leases over 12 months go on the balance sheet: you gain the right to use the office and owe payments. Record a right-of-use asset-the right to use it-and a lease liability-the promise to pay. Here, both start at the present value of lease payments. A finance lease has interest plus amortization, so total expense is generally higher early. An operating lease has one straight-line lease cost each year, while still having an asset and liability. For leases of 12 months or less, you can elect short-term treatment and expense payments instead. Exam recap: over 12 months, record both, then classify finance or operating. So, no: your five-year office lease creates a right and an obligation; its type sets the expense pattern. Practise 10 lease questions now!