As per AS 17 lease accounting, lease rental to be charged to P&L should be on equal basis over the period of the lease. For Example -
period of Lease is 3 yrs
Year 1 - 10000 p.m.
year 2 - 12000 p.m.
Year 3 - 14000 p.m.
As a general practise, lease rental chargeable to P&L is 10000 p.m for year 1, 12000 p.m. for year 2 and so on. but as per the AS, lease rental should be charged in the following manner -
equalised lease rent p.m. = (1000*12+12000*12+14000*12)/3*12 = 12000 p.m over a period of 3 years
In this case rent for the 1st year would be 12000*12 = 144000 instead of 10000*12 = 120000. So the diff. of 24000 thousand will be transferred to lease Equalisation reserve a/c. Same practise will be followed for 3 years (i.e. lease period) and at the end of the lease period lease Equalisation reserve a/c will be zero.
