Lease Amortization Schedule: How to Build and Read One

A lease amortization schedule is the period-by-period roll of a lease liability and its right-of-use (ROU) asset. Each row starts with the opening liability. It adds interest at the discount rate, subtracts the payment, and lands on the closing liability. Under ASC 842-20-35-1(a) and 842-20-35-3(a), the liability side works the same way for operating and finance leases.

The ROU asset side and the expense line are where the two schedules split.

This page builds one lease both ways, with every input stated so you can check the math. It then shows what changes when rent is paid in advance. For a five-year lease with monthly payments, see the worked example in the lease liability guide.

What goes in each column of a lease amortization schedule?

Think of the schedule as two rolls side by side. The left half tracks the lease liability. The right half tracks the ROU asset.

• Opening liability. At commencement, ASC 842-20-30-1(a) measures it at the present value of the lease payments not yet paid, using the discount rate for the lease.
• Interest. Opening balance times the periodic rate. This is the accretion on the liability.
• Payment. The cash paid in the period.
• Principal reduction. Payment less interest. This is how much the liability actually falls.
• Closing liability. Opening balance plus interest, less the payment. It becomes next period's opening balance.
• ROU asset. Opening balance, amortization for the period, and closing balance.

The rate comes from the lease. ASC 842-20-30-3 uses the rate implicit in the lease when it is readily determinable, and otherwise the lessee's incremental borrowing rate. A lessee that is not a public business entity may elect, by class of underlying asset, to use a risk-free rate instead of its incremental borrowing rate (ASC 842-20-30-3). The guide to calculating the incremental borrowing rate covers how that rate is set.

Worked example: one lease, every input stated

Here are the inputs. Every figure below follows from them.

• Lease term: 5 years, no renewal or purchase option.
• Payment: $48,000 a year, fixed, paid in arrears on the last day of each year. Total payments are $240,000.
• Discount rate: 7.0% a year, compounded annually to match the annual payments.
• No initial direct costs, lease incentives or payments made before commencement.
• Figures are rounded to the cent each year.

The present value of five $48,000 payments at 7% is $196,809.48. That is the opening lease liability. Under ASC 842-20-30-5, the ROU asset starts at the same $196,809.48, because there is nothing to add to the liability.

The lease liability schedule

The payment is $48,000 in every row, so the table shows the principal instead.

Check any row: $196,809.48 × 7% = $13,776.66. Then $48,000 − $13,776.66 = $34,223.34 of principal. Total interest plus the opening liability equals total cash: $43,190.52 + $196,809.48 = $240,000.

How do you build a lease amortization schedule in Excel?

Give each period its own row and use the columns listed at the top of this page. Row 0 holds the commencement balance, and each closing balance carries to the next row as its opening balance. The last closing balance must be $0.00.

Excel's PV function returns the commencement balance. With payments in arrears, =PV(7%,5,-48000) returns $196,809.48. For payments in advance, the commencement payment is not part of the liability (ASC 842-20-30-1(a)).

So use type 0 over the remaining periods: =PV(7%,4,-48000) returns $162,586.14. Type 1 over the full term returns $210,586.14, which includes the day-1 payment. That is the ROU asset in the advance case below, not the liability.

One control ties the whole roll: total interest equals the payments made through the liability less the opening liability. Here, $240,000 − $196,809.48 = $43,190.52. In the advance case it is $192,000 − $162,586.14 = $29,413.86.

What does a finance lease amortization schedule add?

A finance lease uses the liability table above unchanged. ASC 842-20-35-1(a) increases the liability for interest and reduces it for payments. It sets interest at "a constant periodic discount rate on the remaining balance of the liability." That is the effective-interest roll in the table.

The ROU asset is amortized on its own track. ASC 842-20-35-7 requires straight-line amortization unless another systematic basis better reflects how the lessee consumes the asset. ASC 842-20-35-8 runs it to the earlier of the end of the ROU asset's useful life or the end of the lease term. If the lease transfers ownership, or the lessee is reasonably certain to exercise a purchase option, it runs to the end of the underlying asset's useful life.

Here that is 5 years, so the annual charge is $196,809.48 ÷ 5 = $39,361.90.

Year 5 amortization is two cents lower, to absorb rounding. ASC 842-20-25-5(a) has the lessee recognize amortization and interest as separate costs. The total is front-loaded: $53,138.56 in year 1, falling to $42,502.07 in year 5.

On the books, the finance lease asset and liability drift apart. At the end of year 1 the asset is $157,447.58 and the liability is $162,586.14. The operating and finance lease journal entries article shows the entries behind each row.

How is an operating lease amortization schedule different?

The liability side is identical. ASC 842-20-35-3(a) measures the operating lease liability at the present value of the payments not yet paid, at the commencement rate. KPMG's Handbook: Leases (paragraph 6.4.160) notes the carrying amount of the liability "is not affected by the classification of the lease."

The expense is different. ASC 842-20-25-6(a) recognizes a single lease cost, allocated straight-line over the remaining term. Here that is $240,000 ÷ 5 = $48,000 a year.

The ROU asset is backed into. KPMG's Handbook (paragraph 6.4.170, Method 2) amortizes the asset by the straight-line cost less the interest accreted on the liability. It says this method and deriving the asset from the liability give the same carrying amount.

The "interest part" is not reported as interest expense. It is a working column that sizes the asset reduction. The income statement shows one line: $48,000 of operating lease cost.

Notice the closing ROU asset equals the closing liability in every year. ASC 842-20-35-3(b) measures the asset at the liability, adjusted for prepaid or accrued payments, unamortized incentives and initial direct costs, and impairment. This lease has none of those.

Escalating rent would open a gap, which the article on accrued rent accounting works through. The ROU asset calculation guide covers the opening adjustments.

How do payments in advance change the schedule?

Move the same $48,000 to the first day of each year, and change nothing else. The first payment is made at commencement, so it is never part of the liability. ASC 842-20-30-1(a) counts only payments not yet paid. ASC 842-20-30-5(b) adds payments made at or before commencement to the ROU asset.

The opening liability is the present value of the four remaining payments: $162,586.14. The ROU asset is $162,586.14 + $48,000 = $210,586.14. Each later payment is made on the first day of the next year. Until then it stays in the closing liability.

For an operating lease, that $48,000 is why the ROU asset starts above the liability. ASC 842-20-35-3(b) carries the difference as a prepaid lease payment. The prepaid amount is each year's day-1 payment, and straight-line cost consumes it over that year. In this example, cost recognized equals cash paid at each year end, so the ROU asset again equals the closing liability.

Each year's starting balance is the prior closing balance less the $48,000 paid on the first day.

Total interest drops to $29,413.86 because each payment goes out a year earlier, so the liability carries one less year of interest. The total still ties: $210,586.14 ROU asset + $29,413.86 interest = $240,000 of cash. The year 4 closing balance is exactly the $48,000 due the next morning.

A monthly lease follows the same logic, with one row per month and a monthly rate. That rate is a convention choice: 7% ÷ 12 is 0.5833% a month, while the effective monthly rate, 1.07 to the power of 1/12 less 1, is 0.5654%. The two give different balances, so state which one the schedule uses in its header, along with the payment timing.

A reviewer cannot recompute a schedule without the payment timing and the compounding convention.

How do you read the current portion and remeasurements from the schedule?

The schedule also feeds the balance sheet split. ASC 842-20-45-1 subjects lease liabilities to the same considerations as other financial liabilities in classifying them as current and noncurrent. KPMG's Handbook: Leases on lease liability classification (Question 6.9.10) describes two approaches it believes may be acceptable under Topic 210, the balance sheet topic.

• Approach 1 takes the principal reduction over the next 12 months as the current portion.
• Approach 2 takes the present value of the payments due in the next 12 months.

In the arrears example, the liability at the end of year 1 is $162,586.14. Under approach 1, year 2 principal of $36,618.97 is current, and $125,967.17 is noncurrent. Under approach 2, the $48,000 due at the end of year 2 is worth $48,000 ÷ 1.07 = $44,859.81, which leaves $117,726.33 noncurrent.

The article on current and noncurrent lease liabilities explains the approaches and their trade-offs.

A schedule also restarts when the lease changes. ASC 842-20-35-4 remeasures the liability for the changes in lease payments described in ASC 842-10-35-4 through 35-5. The remeasurement amount adjusts the ROU asset.

ASC 842-20-35-5 updates the discount rate at that date, except in the cases it lists. For a finance lease, ASC 842-20-35-7 adjusts amortization prospectively from the remeasurement date. From that row on, the schedule runs from the new balances.

The remeasurement triggers article lists the events.

For the period-end rollforward that auditors tie to, see the ROU asset rollforward schedule. For the broader standard, see the ASC 842 lease accounting guide.

Frequently asked questions

Is the lease liability schedule different for an operating lease and a finance lease?

No. The liability roll is the same for both classifications. In the example on this page, both schedules open at $196,809.48 and accrue the same interest each year. What differs is the right-of-use asset and the income statement.

Why does my operating lease ROU asset equal the lease liability every year?

In the arrears example, it is because the payments are level and there are no prepaid or accrued payments, lease incentives or initial direct costs. ASC 842-20-35-3(b) measures the operating ROU asset at the lease liability adjusted for those items. With nothing to adjust for, the two balances match. Escalating rent or free months open a gap between them.

Sources and further reading

• ASC 842-20-30-1, 842-20-30-3 and 842-20-30-5 — initial measurement of the lease liability and ROU asset, and the discount rate.
• ASC 842-20-35-1, 842-20-35-7 and 842-20-35-8 — finance lease liability, ROU amortization method and amortization period.
• ASC 842-20-25-5 and 842-20-25-6 — finance lease costs and the operating single lease cost.
• ASC 842-20-35-3 — operating lease liability and ROU asset after commencement.
• ASC 842-20-35-4 and 842-20-35-5 — remeasuring the liability and updating the discount rate.
• ASC 842-20-45-1 — presentation, and current/noncurrent classification of lease liabilities.
• KPMG Handbook: Leases — paragraphs 6.4.10–6.4.50 on finance leases, and 6.4.150–6.4.170 on operating leases and the two ROU asset methods.
• KPMG Handbook: Leases, Question 6.9.10 — the two approaches to the current portion of the lease liability.
• The lease liability guide explains what the balance represents, and lease commission amortization covers initial direct costs in the ROU asset.

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