Lease
What is a Lease?
A lease is an agreement where the lessee pays to the lessor an amount of money over time for equipment etc.
![le1.1](https://seeaccountingnow.online/wp-content/uploads/2021/08/le1.1.jpg)
Loan Vs Lease
Loan
A business may need to buy a new asset, such as equipment.
![le2.1](https://seeaccountingnow.online/wp-content/uploads/2021/08/le2.1.jpg)
The business can buy this asset by borrowing money via a loan.
![le3](https://seeaccountingnow.online/wp-content/uploads/2021/08/le3.jpg)
They will need to pay interest on the loan.
![le4](https://seeaccountingnow.online/wp-content/uploads/2021/08/le4.jpg)
And they will also need to make principal repayments
![le5](https://seeaccountingnow.online/wp-content/uploads/2021/08/le5.jpg)
The problem with a loan is the principal must be repaid over the loan term.
![le6](https://seeaccountingnow.online/wp-content/uploads/2021/08/le6.jpg)
This can make those payments prohibitively high.
![le7](https://seeaccountingnow.online/wp-content/uploads/2021/08/le7.jpg)
Lease
Alternatively, the business could acquire the asset with a finance lease.
![le8](https://seeaccountingnow.online/wp-content/uploads/2021/08/le8.jpg)
Again, the business will need to pay principal and interest.
![le9](https://seeaccountingnow.online/wp-content/uploads/2021/08/le9.jpg)
With a lease, though, the principal repayments are spread over the asset’s useful life.
![le10](https://seeaccountingnow.online/wp-content/uploads/2021/08/le10.jpg)
Total interest will be higher with a lease.
![le11](https://seeaccountingnow.online/wp-content/uploads/2021/08/le11.jpg)
However a lease offers lower principal payments.
![le13.1](https://seeaccountingnow.online/wp-content/uploads/2021/08/le13.1.jpg)
Capital Lease
A capital lease is a lease where the lessee ends up owning the asset.
![le14](https://seeaccountingnow.online/wp-content/uploads/2021/08/le14.jpg)
Here, the lessee makes lease payments throughout the lease term as per normal.
![le15](https://seeaccountingnow.online/wp-content/uploads/2021/08/le15.jpg)
Then, at the end of the lease term, the lessor may offer a bargain basement purchase option.
![16.1](https://seeaccountingnow.online/wp-content/uploads/2021/08/16.1.jpg)
This is usually priced well below market price, making it attractive for the lessee.
![le17](https://seeaccountingnow.online/wp-content/uploads/2021/08/le17.jpg)
The lessee may then purchase the asset and end up owning it.
![le18](https://seeaccountingnow.online/wp-content/uploads/2021/08/le18.jpg)
With a finance lease, both the asset and the liability need to be shown on the balance sheet.
![le19](https://seeaccountingnow.online/wp-content/uploads/2021/08/le19.jpg)
Operating Lease
Many leases do not end up being owned by the lessee.
![le20](https://seeaccountingnow.online/wp-content/uploads/2021/08/le20.jpg)
These leases are usually held for a much shorter time period and are treated as an expense, only.
![le21](https://seeaccountingnow.online/wp-content/uploads/2021/08/le21.jpg)
© R.J. Hickman 2020