Understanding a right of use asset

Definition

A right of use asset is the remaining value of your right to occupy leased property through the end of the lease. On the books, this is a non-current asset, not rent and not a building you own.

You record it when the lease starts, then you write it down over the periods you actually use the space or the equipment. The matching owe is a lease liability; this page is the asset side of that pair.

Cash-basis books often skip this line and record rent when paid. Accrual books that follow current lease rules put the right on the Balance Sheet on day one.

This balance is the unused right, not cash in the bank. It is also not the improvements you paid to build out a rented shop.

Where it shows up

Balance Sheet: Located with the long-lived assets, below current assets.

P&L: Related to the periodic write-down of the leased right.

See also: Lease Liability · Rent Expense · Non-Current Assets

When you look at your Balance Sheet, this line sits below current assets, with the other long-lived items. Many packs show it next to equipment and other non-current assets.

A high total usually means a long remaining term on a shop, a warehouse, or a fleet of vehicles. A low total usually means the lease is short, nearly finished, or the books record rent instead.

The profit and loss statement does not list this account as a line. The related charge is the write-down each period.

The first recording usually does not move cash. You debit this asset and credit the lease liability for the same amount.

How it works

The right gets onto the books when you sign a lease that is more than a short-term rental. You measure it from the remaining payments, often discounted, plus any amounts paid up front that belong with the lease.

You debit this account and credit the lease liability. Cash stays put unless a first installment or a fee is added into the asset.

• Measure the right to use the leased item over the lease term
• Debit this asset and credit the lease liability at commencement
• Amortize the right over the lease term
• Keep buildouts in leasehold improvements, not here
• Clear the asset as the remaining right is used up

The cost stays here while time remains on the lease. You do not drop the whole remaining rent onto the P&L in month one.

Each period, you write a slice of the right down. That slice is the charge on the P&L, and it reduces this asset.

Keep a supporting schedule of each lease, its term, and the remaining right. A van still in the bay should be on that list; a lease that ended last year should not.

When the lease ends, this account should sit at zero. If you then buy the item, you record that purchase as a new owned asset, not as leftover right.

Do not mix this line with improvements you paid to build out a rented shop. Those improvements are a different long-lived item.

A month-to-month stall that you can walk away from often never lands here. Ordinary rent expense is the charge for that kind of occupancy.

Example

An HVAC shop signs a five-year lease on a warehouse bay. The right to use that bay over the term is measured at $60,000.

The shop records:

Debit: Right of use asset $60,000

Credit: Lease liability $60,000

The right of use asset goes up by $60,000, and the lease liability goes up by $60,000. Cash has not moved.

The Balance Sheet is larger on both sides. The Income Statement has not taken $60,000 of rent that day.

Each year the shop writes down $12,000 of the right:

Debit: Amortization expense $12,000

Credit: Right of use asset $12,000

The asset falls by $12,000, and the P&L takes the $12,000 charge. After five years the right is gone.

Common mix-ups

A right of use asset is not the building. You do not own the warehouse; you own the remaining right to use it.

This account is not rent expense. Short-term or cash-basis rent hits the P&L when paid; this asset is the unused right under a longer lease.

This asset is not leasehold improvements. Money you spent to build out the bay is a separate long-lived item.

Related terms

• Lease Liability: The recorded obligation for future lease payments.
• Rent Expense: The periodic cost of occupying leased space.
• Non-Current Assets: Assets the business expects to hold and use for more than a year.
• Amortization Expense: The periodic charge that writes off an intangible asset over its life.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Long-Term Liabilities: Obligations that come due more than a year out.
• Leasehold Improvements: Capitalized upgrades made to a rented space.
• Supporting Schedule: A detailed worksheet backing up a single line on the financial statements.