Friday, July 10, 2009

The two type of leases

There are actually two different ways to account for a lease depending upon the specific details of the lease agreement. The first (and easiest) method is to account for the lease as if the transaction were simply a rental agreement. This is called an operating lease and is essentially a sort-term lease.
The second method is to account for the lease as if the transaction were essentially a purchase of the asset by the lessee that is being financed by the lessor. This is called capital lease and this is what was described above.
The lessee (buyer) and the lessor (seller) separately determine whether the lease is accounted for as an operating or capital lease.

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