IFRS 16 – Part 4: Lease Commencement Journals & Payment Schedules in Business Central

A step-by-step walkthrough of creating a lease card, generating the amortisation schedule, posting initial recognition, and processing the full monthly journal cycle in Dynamics 365 Business Central.

Post 3 covered every configuration step that must be done before a lease is entered inside business central. This post picks up from that point and walks through the full operational lifecycle of a lease in Business Central (from creating the linked Fixed Asset and Lease Card pair, right through to the recurring monthly journals for interest, FA depreciation, and payment).

I have used the same five-year office lease from Post 2 (£25,000 per month, 10% lease payment increase at start of each new lease year, 3.75% IBR, £3,470 Initial direct cost & £1,655,869 ROU asset) so you can trace every number from the accounting model directly into the system. Each BC screen is annotated to highlight the fields that matter most.

What Business Central automates and what you control

Once a lease card is saved with complete and accurate terms, Business Central generates the full amortisation schedule automatically. Every interest charge, every principal repayment, every depreciation entry, for the entire lease term. You do not need to enter these individually.

The monthly journal cycle in BC has three distinct steps:

1. Interest accrual: Unwind the interest on the opening lease liability balance at the IBR. Posts to finance cost and accrued interest liability.

2. Lease payment: Record the cash payment. Clears accrued interest and reduces the principal balance of the lease liability.

3. ROU depreciation: Straight-line depreciation charge on the ROU asset. Posts to depreciation expense and accumulated depreciation.

Now let’s have a look on how to configure this inside Business central.

Create the linked Fixed Asset and Lease Card pair

Every ROU lease begins with two records: a Fixed Asset card (the master for the asset side) and a Lease Card (the extension that holds the lease economics). In BC, these can be created in either order, but the cleanest workflow is to create the FA first, then the Lease Card with a link to it.

Step 1: Create the Fixed Asset (ROU)

The FA Card holds asset identity, the FA Class (e.g. ROU PROP), the FA Posting Group that drives asset-side postings, and the depreciation book that the Lease Book will work alongside.

Fixed Asset Card handles asset's acquisition and depreciation postings to the correct ROU GL accounts.

Step 2: Create the Lease Card linked to the FA

With the FA in place, create the Lease Card. The critical field is Linked Fixed Asset No. This is the link that turns the FA into a ROU.

(Grey fields are computed values)

Fields shown in grey above are Lease Expiration Date, Initial Lease Liability and ROU Asset Cost are calculated by BC from your inputs.

(Useful Life and Depreciation Method are live on the linked FA's Depreciation Book).

How the two cards work together

Once both cards are saved and linked:

• The FA Card drives all asset-side journals: Acquisition at commencement (via FA acquisition journal), Monthly depreciation (via the FA Calculate Depreciation batch job) and Disposal at termination.

• The Lease Card drives all liability-side journals: Initial liability recognition at commencement, Monthly interest accrual, Monthly payment and any modifications.

• The FA No. ↔ Lease No. cross-reference is the link auditors and finance teams use to reconcile a single lease across both ledgers.

• GL Accounts are determined based on FA Posting Group of Asset Card & Lease Posting Group defined on related Lease Card.

Payment convention: arrears vs advance

This field has a significant impact on the amortisation schedule and must match the actual lease contract.

1. Payments in arrears (most UK commercial property leases) are discounted over the full period. The first payment is at the end of period.

2. Payments in advance (common for vehicle leases) reduce the liability immediately from commencement. I.e. the first payment is on day one, so it is not discounted.

Step 3: Calculate Lease Schedule

Once the lease card is created user needs to click Calculate Schedules to generate Liability amortisation schedule. Amortisation schedule helps to calculate ROU asset and the lease liability.

Step 4: Create & Post Commencement Journal

Action needs to be provided on Lease card to create the entries.

The commencement journal is the initial recognition entry. It puts the ROU asset on the balance sheet (via the FA acquisition) and recognises the lease liability (via the Lease module).

Please find below list of journal entries automatically created by system in Journal template name & batch specified in previous blog.

Payment of solicitor Fees : This will be processed as part of normal accounts payable processes.

Associated General Ledger Entry

ROU Asset & Lease Liability Entries

This will be processed with developed extension Lease Engine of Microsoft Dynamics 365 BC.

Associated General Ledger Entry

Associated Fixed Asset Ledger Entry

Commencement journal: point of no return

Once both commencement journals are posted, the lease moves to Active status. FA is acquired and the amortisation schedules are locked.

Errors in the lease card or FA card inputs (IBR, Payment amount, Dates, Depreciation start date) requires a manual reversal and re-entry on both ledgers.

Step 5: Monthly Journals

After commencement, Business Central processes three types of recurring journal each period. BC proposes these from the amortisation schedule (for interest and payment) and from the FA Depreciation Book (for ROU depreciation). User can review and post. Here is the full month end sequence for Month 1 of our example lease.

Interest Accrual Journal (Interest Batch)

For a monthly payment of lease, BC proposes the annual interest at the end of the payment period.

Associated General Ledger Entry

Payment Journal (Repayment Batch)

The payment journal records the actual cash outflow and settles both the accrued interest and a portion of the principal for particular month. The bank payment of £25,000 here resulting into payment of the accrued interest (£5,174.59) and reducing the principal lease liability (£19,825.41)

Associated General Ledger Entry

Depreciation journal (FA Depreciation engine)

This is where the FA as master architecture pays off. The monthly depreciation charge on the ROU asset (£1,659,339 ÷ 60 month = £27,655.65) is calculated and posted via Business Central's standard Calculate Depreciation batch job, the same engine used for owned fixed assets. There is no separate "lease depreciation" routine to maintain.

Associated General Ledger Entry

Associated Fixed Asset Ledger Entry

This is what enables ROU assets to appear in standard FA reports. (Depreciation register, Fixed asset book value, FA disposal alongside owned assets, and reconcile automatically to the GL).

Month-end close checklist for leases

1. Post interest accrual journals for all active leases: Run via Asset Leasing → Periodic Tasks → Create Interest Accrual Journals. Review proposed entries against schedule before posting.

2. Post payment journals for leases with payments due this period: Match payment dates in BC to actual bank payments.

3. Run FA depreciation for ROU assets: Fixed Assets → Periodic Activities → Calculate Depreciation. Filter on FA Class (ROU PROP, ROU VEH, ROU EQU) and the Company depreciation book. Verify total depreciation charge agrees to the FA Depreciation Schedule report.

4. Reconcile both ledgers to the GL: Run the Lease Liability Summary (Lease Ledger) and FA Book Value report (FA Ledger) from BC and agree both to GL balances. Any difference indicates a missed journal, a posting through the wrong template, or a manual posting to a lease account that should not have been made.

5. Review lease register for new leases, modifications, or terminations: Confirm with property/fleet/procurement teams whether any new leases commenced, existing leases were modified, or leases terminated during the period. Each triggers separate accounting (Will be covered under Post 5).

Cash flow statement presentation

IFRS 16 changes how lease payments appear in the cash flow statement, A point that often catches finance teams off guard when preparing the statement of cash flows.

Year 1 cash flow presentation — LE0001 on 31st December 2026

Operating activities: Lease interest paid (34,914.31)

Financing activities: Repayment of lease liabilities (principal)(140,085.69)

Total lease cash outflows (= Actual Payment)(175,000)

The interest portion may be classified in either operating or financing activities under IAS 7, but whichever policy is adopted must be applied consistently and disclosed.

Most UK entities classify lease interest in operating activities alongside other finance costs. BC's cash flow reports can be configured to reflect this split.

Non-cash disclosure

The commencement of a new lease is a significant non-cash transaction (recognition of ROU asset and lease liability without cash changing hands). This must be disclosed as a non-cash financing activity in the notes to the cash flow statement or on the face of the statement. It does not appear as a cash inflow or outflow.

→ Up next: Post 5: Lease modifications & reassessments in Business Central

How to process lease modifications (Term extensions, Scope changes, Rent reductions), reassessments triggered by changes in circumstances, and lease terminations, including the BC journal workflow and the accounting entries for each scenario.

📝 This post reflects the author's professional views and is for informational purposes only. It does not constitute legal, financial, or accounting advice.