Financial Accounting and Reporting-CPA Exam 2025 – 400 Free Practice Questions to Pass the Exam

Rental income for operating leases is generally recognized on an accrual basis. This means that income is recorded in the periods in which it is earned, rather than when cash is received. Under the accrual accounting method, lessors will recognize rental income consistently over the lease term, even if payments are not received at that exact time.

This approach aligns with the requirement of matching revenues and expenses to the appropriate periods they relate to, which is a core principle in accounting. By recognizing rental income on an accrual basis, lessors ensure that their financial statements reflect the economic reality of the lease transactions, showing income as it is earned rather than when payments are actually made.

For example, if a lease agreement stipulates monthly rental payments, the lessor will recognize income each month, regardless of whether the cash payment is physically received at that moment. This provides a more accurate picture of the financial performance related to leased assets.