ROU (Right-of-Use) Asset – Journal Entry

Under Ind AS 116 / IFRS 16 / ASC 842, when a company enters into a lease (other than very short-term or low-value leases), it must record:

1. A Right-of-Use (ROU) Asset
2. A Lease Liability

Why?

Because the company now has:

• The right to use the leased asset (ROU Asset), and
• The obligation to make lease payments (Lease Liability).

At Lease Commencement Date

You measure the Lease Liability at the present value of all future lease payments.
Then you measure the ROU Asset, usually equal to:

ROU Asset =
   Lease Liability
 + Initial direct costs (if any)
 + Lease payments made at or before commencement
 - Lease incentives received

Journal Entry at Commencement

Dr ROU Asset
    Cr Lease Liability

This records the company’s right to use the asset and its obligation to pay for it over time.

Practical Example (With $/Rs)

Scenario

ABC Ltd leases equipment for 3 years.
Annual lease payments: $12,000 (≈ Rs 10,00,000) payable at year-end.
Present value of all lease payments = $30,000 (≈ Rs 25,00,000).
No initial direct costs or incentives.

Journal Entry on Lease Commencement

Dr ROU Asset .................... $30,000 (Rs 25,00,000)
      Cr Lease Liability ............. $30,000 (Rs 25,00,000)

Meaning

• ABC Ltd now records a Right-of-Use Asset (value of using the equipment).
• It also records a Lease Liability for future payments.