Finance Lease vs Operating Lease Explained with Accounting Basics
One of those areas that appear straightforward at first glance – the use of an asset for a fee – but the accounting rules can get complicated very easily. It's really a question of who -- in fact -- owns the asset, rather than in form. After you get that concept, the rest should fall into place. Financial Lease A financial lease (also known as a finance lease) is a lease that is considered more like ownership. The liability and value of the asset are primarily borne by the lessee, even if the title of the property does not pass to him or her right away. This in practice, entails the business keeping the asset on their balance sheet. An Asset and a Liability for the obligation to pay a Lease. Operating Leases Operating leases are more akin to leasing. The asset remains under the ownership of the lessor and the lessee pays for the asset for a set period of time. In the past, these were not included on the balance sheet and the lease payment were treated as expenses. This has some...