Most government accounting teams have implemented GASB 87. The hard part now is keeping journal entries correct as leases change through reassessments, renewals, and early terminations.
When those changes hit, modified accrual activity often stops tying cleanly to government-wide statements. That is where audits find problems.
This guide walks through every major GASB 87 journal entry scenario for both lessees and lessors, across full accrual and modified accrual accounting, from commencement through termination. Each section includes practical journal entries, account-level examples, and plain-language explanations you can apply directly.
Under GASB 87, most long-term leases are treated more like financed purchases than simple rent agreements. That means nearly every journal entry under the standard is built from the same five inputs:
Under prior GASB guidance, lessee accounting depended on whether a lease was classified as operating or capital. GASB 87 eliminated that distinction and moved government accounting to a financing-style model instead. In practice, that means most long-term leases now create both a lease liability and a right-to-use asset at commencement.
The shift was part of a broader push for balance-sheet transparency.
Short-term lease classification is part of the "lease term" and "classification" inputs above. It can change which journal entries apply.
Under GASB 87, a lease qualifies as short-term only if its maximum possible term is twelve months or less, including all renewal options, regardless of whether those options are exercised.
The renewal-option rule is where many misclassifications occur. A lease is not short-term if a renewal option extends the maximum possible term beyond twelve months, or if the lease cannot be canceled by both parties without the other party's approval.
When a lease qualifies as short-term, the recognition model does not apply. Lessees record lease payments as incurred, and lessors record revenue when payments are received.
Those inputs drive whether the lease is short-term, transfers ownership, or follows the core model.
This section relies most on the present value, discount rate, and lease term inputs.
Under full accrual accounting, lessee-side GASB 87 accounting centers on three recurring activities: recognizing the lease at commencement, splitting each payment between principal and interest, and amortizing the right-to-use asset over time.
At commencement, the government records both a lease liability and an intangible right-to-use asset. The entry reflects the right to use the underlying asset, not ownership of the asset itself. The Oregon Department of Administrative Services illustrates the entry as:
Debit: Intangible Right-to-Use Lease Asset (08XX-Leased Asset)
Credit: Lease Liability (1716-Lease Obligations)
The opening lease liability equals the present value of lease payments expected over the lease term, including payments reasonably certain to occur and certain variable payments measured using the rate or index in effect at commencement.
Each subsequent lease payment is split between:
A typical periodic payment entry appears as follows:
Debit: Lease Liability
Debit: Interest Expense
Credit: Cash
Interest expense is calculated using the effective interest method, meaning the outstanding liability balance is multiplied by the discount rate for the period. As the liability declines, the interest portion decreases over time.
Separately, the right-to-use asset is amortized on a straight-line basis over the shorter of the lease term or the asset's useful life. Oregon DAS documents the amortization entry as:
Debit: Amortization Expense
Credit: Accumulated Amortization, Lease Asset
At year-end, governments reclassify the portion of the lease liability due within the next twelve months from noncurrent to current liabilities. Oregon DAS documents the process as:
Step 1: Debit Lease Liability, Noncurrent; Credit System Clearing GL
Step 2: Debit System Clearing GL; Credit Lease Liability, Current
The right-to-use asset and lease liability generally begin at the same balance but diverge over time. The asset declines evenly through straight-line amortization, while the liability declines under the effective interest method as principal payments reduce the outstanding balance.
Most modifications change one or more key inputs, such as lease term, discount rate, or expected payments, and that drives the updated entries.
Before recording a lease modification under GASB 87, you should confirm whether the change should be treated as a separate new lease instead of a remeasurement of the existing one.
Under GASB 87 paragraphs 71-73, a modification is treated as a separate lease if:
If both conditions are met, the government records the change as a new lease with a separate commencement entry. If not, the existing lease must be remeasured instead.
When a lease modification changes the scope, term, or expected payments of an existing lease without creating a separate new lease, the lessee must remeasure the lease liability using the revised present value of remaining lease payments. The right-to-use asset is then adjusted by the same amount.
If the modification increases the scope or expected payments of the lease, both the lease asset and liability increase. If the modification reduces the scope or payments, both balances decrease.
Cradle Accounting illustrates a lease remeasurement at a June 1, 2023 modification date with the following entry:
Debit: Lease Asset $21,635.69
Credit: Lease Liability $21,635.69
The remeasurement amount represents the change in the present value of remaining lease payments after the modification.
The revised liability is calculated using an updated discount rate. Under GASB 87, the lessee first uses the rate charged by the lessor if it is stated or can be reasonably determined from the agreement. If no rate is available, the lessee uses its incremental borrowing rate (IBR): the estimated rate the government would pay to borrow funds over a similar term.
DebtBook's guide to incremental borrowing rates summarizes the calculation as:
Risk-Free Rate + Credit Spread = Incremental Borrowing Rate
For example, if:
then the resulting estimated incremental borrowing rate would be 0.64%.
A 60-month lease, for example, should use a 5-year comparable borrowing rate rather than a shorter-term benchmark. Governments without recent comparable borrowings may rely on similar municipal issuances, published market indexes, or the lessor's implicit rate if it can be reasonably estimated under GASB 87.
A full lease termination removes both the remaining lease liability and the related right-to-use asset from the books. Under GASB 87, the lessee first eliminates accumulated amortization, then removes the lease asset itself, and finally clears any remaining lease liability.
The Oregon Department of Administrative Services documents the termination process as:
Step 12a: Debit Accumulated Amortization, Lease; Credit System Clearing GL
Step 12b: Debit System Clearing GL; Credit Leased Asset
Step 12c (if applicable): Record any remaining gain or loss on termination
Step 13: Debit Lease Liability; Credit GAAP Revenue Offset
A gain or loss is recognized only if the termination reduces the carrying value of the lease asset to zero. If part of the asset's carrying value remains after accumulated amortization is removed, no gain or loss is recorded. This prevents artificial gains or losses caused solely by differences between the asset amortization schedule and liability reduction schedule.
In San Joaquin County's DebtBook case study, Assistant Auditor-Controller Jian Ou-Yang described how spreadsheet-based lease modifications forced teams to rebuild entire schedules manually. DebtBook automated the recalculation process and reduced some modifications from hours of work to roughly fifteen minutes.
The same five inputs still drive the schedule, but modified accrual changes where the activity shows up and how the reconciliation is prepared.
Modified accrual accounting treats GASB 87 leases at the fund level. The government's record:
At commencement, the present value of the lease is recorded as a capital outlay expenditure offset by another financing source. The Questar/NYS BOCES implementation documents the entry as:
Debit: Capital Outlay (H2110.200 Equipment Expenditure)
Credit: Other Financing Source: Lease Proceeds (H5788-Leases)
As the AICPA Journal of Accountancy explains, modified accrual funds treat the right-to-use asset similarly to a capital purchase. Meanwhile, the related lease obligation is recorded as an other financing source rather than a long-term liability on the governmental fund balance sheet.
On each payment date, the cash payment is recorded as debt service expenditures for principal and interest:
Debit: Debt Service: Principal ($863.02)
Debit: Debt Service: Interest ($136.98)
Credit: Cash ($1,000.00)
Unlike full accrual accounting, governmental funds do not record amortization expense because the right-to-use asset does not remain on the fund balance sheet after the initial expenditure recognition. As CPA Hall Talk notes, modified accrual funds do not post amortization entries because the asset itself is not carried on the governmental fund balance sheet.
At year-end, governments prepare a GASB 34 reconciliation to convert fund-level activity into the government-wide full accrual presentation. The reconciliation:
Typical reconciliation entries include:
Debit: Right-to-Use Lease Asset
Credit: Capital Outlay Expenditure
Debit: Other Financing Source: Lease Proceeds
Credit: Lease Liability
Debit: Amortization Expense
Credit: Accumulated Amortization
Debit: Lease Liability
Credit: Debt Service Principal Expenditure
The reconciliation does not change the underlying cash activity. It changes the reporting framework: governmental funds focus on current financial resources, while government-wide statements report long-term economic resources and obligations.
Governmental funds do not carry the right-to-use asset or the long-term lease liability on the fund balance sheet after commencement. For modifications and terminations, the cash accounting often continues through debt service, and the clean-up happens in the year-end GASB 34 reconciliation.
If a modification or termination changes the government-wide lease liability and right-to-use asset, the reconciliation typically includes entries that adjust those government-wide balances to match the updated schedule, along with any required gain or loss recognition at the government-wide level.
On the lessor side, the same inputs apply, but the entries flow through a lease receivable and a deferred inflow of resources.
Lessor accounting under GASB 87 mirrors the lessee model, but from the owner's perspective. Instead of recording a right-to-use asset and lease liability, the lessor records:
Unlike older capital lease accounting models, the lessor does not remove the underlying asset from the balance sheet. The asset remains on the books and continues to depreciate over its normal useful life.
The Oregon Department of Administrative Services documents the commencement entry as:
Debit: Lease Receivable, Noncurrent (0941)
Credit: Deferred Inflow of Resources, Lease Receivable (1861)
Under the older standards, certain capital leases required lessors to derecognize the leased asset entirely. GASB 87 instead keeps the underlying asset on the lessor's balance sheet throughout the lease term.
Over the life of the lease, the lessor recognizes two separate revenue components:
As Plante Moran explains, interest income is calculated using the discount rate applied to the outstanding lease receivable balance. The receivable declines over time, so the interest income is higher in earlier periods and lower in later periods.
The deferred inflow is recognized as lease revenue systematically over the lease term, most commonly on a straight-line basis, although GASB 87 paragraph 54 permits any systematic and rational approach.
If the agreement does not specify a discount rate, the lessor estimates the rate implicit in the lease using the value of the underlying asset and the expected lease payments.
If the implicit rate cannot be determined directly, lessors may estimate the rate using observable market information, including:
After commencement, lessor accounting has two repeating entries: one to record the cash receipt and reduce the receivable (while recognizing interest income), and one to recognize lease revenue by reducing the deferred inflow of resources.
When the lessee makes a periodic payment, the lessor typically records:
Debit: Cash
Credit: Interest Revenue
Credit: Lease Receivable
Separately, the lessor recognizes lease revenue over the lease term by reducing the deferred inflow of resources:
Debit: Deferred Inflow of Resources, Lease Receivable
Credit: Lease Revenue
The two entries are related but not interchangeable. The cash receipt entry updates the receivable and recognizes interest. The deferred inflow entry is what moves revenue into the period.
Lessor modifications under GASB 87 generally mirror the lessee side: the lease receivable is remeasured, and the deferred inflow of resources is adjusted by the same amount.
If the modification increases the value of the lease, the lessor records:
Debit: Lease Receivable, Noncurrent
Credit: Deferred Inflow of Resources, Lease Receivable
The deferred inflow increases because the additional lease revenue has not yet been earned. It will be recognized over the remaining lease term. If the lease includes an allowance for uncollectible receivables, the allowance is adjusted alongside the receivable balance.
For lease terminations, the lessor removes the remaining lease receivable and deferred inflow from the books and records any resulting gain or loss. The Oregon Department of Administrative Services summarizes the process as:
Step 13a: Record gain or loss based on the remaining receivable balance less the deferred inflow balance
Step 13b: Eliminate remaining lease receivable balance
The gain-or-loss calculation is mechanical: subtract the deferred inflow balance from the remaining noncurrent lease receivable balance. The resulting amount determines whether a gain or loss is recognized.
Before recording the termination, governments typically reverse any prior year-end reclassification that moved part of the receivable into current assets. Elimination of any allowance for doubtful receivables, and then removal of the remaining receivable and deferred inflow balances, also takes place.
After you review the lessee, modified accrual, and lessor entries individually, the side-by-side view becomes the year-end reference: every row uses the same lease inputs and only the accounting framework changes.
| Event | Full Accrual (Government-Wide / Proprietary) | Modified Accrual (Governmental Fund) |
| Commencement | Debit: Intangible Right-to-Use Lease Asset; Credit: Lease Liability at present value | Debit: Capital Outlay; Credit: Other Financing Source at present value |
| Periodic Payment | Debit: Lease Liability (principal portion); Debit: Interest Expense; Credit: Cash, effective interest split | Debit: Debt Service: Principal; Debit: Debt Service: Interest; Credit: Cash, e.g., $863.02 / $136.98 / $1,000.00 |
| Amortization | Debit: Amortization Expense; Credit: Accumulated Amortization, straight-line over shorter of lease term or useful life | No entry: asset never recognized at fund level |
| Year-End | Current/noncurrent reclassification of lease liability for next 12 months of payments | No asset entry; GASB 34 reconciliation bridges fund to government-wide statements |
| Termination | Remove accumulated amortization; remove asset; eliminate remaining liability; gain or loss if asset reduces to zero | No asset to remove; gain or loss flows through GASB 34 reconciliation |
The GASB 34 reconciliation is the bridge between the two accounting frameworks shown above. Governmental funds focus on current financial resources, while government-wide statements recognize long-term assets and liabilities. As a result, the same lease produces different accounting treatment under each model.
The reconciliation converts fund-level activity into the government-wide view by adding back the right-to-use asset and long-term lease liability to the government-wide statements. It also replaces fund-level capital outlay and debt service expenditures with the corresponding amortization expense and liability reduction activity required under full accrual accounting.
Because the reconciliation ties the two frameworks together, it is also where auditors most often identify missing year-end reclassifications, incomplete modifications, or other entries posted on only one side of the accounting bridge.
Every GASB 87 journal entry, from commencement to termination, ultimately flows from the same core inputs: lease term, payments, discount rate, and classification. What makes GASB 87 difficult is not a single entry, but maintaining accurate schedules, remeasurements, and reconciliations across years of reporting.
For governments managing large lease portfolios, DebtBook Lease Management helps automate lease schedules, recalculations, and audit-ready GASB 87, ASC 842, and GASB 96 reporting throughout the full lease lifecycle.
Disclaimer: DebtBook does not provide professional services or advice. DebtBook has prepared these materials for general informational and educational purposes, which means we have not tailored the information to your specific circumstances. Please consult your professional advisors before taking action based on any information in these materials. Any use of this information is solely at your own risk.