A lease is a contractual agreement whereby one party i.e., the owner of an asset grants the other party the right to use the asset in return for a periodic payment. In other words, it is a renting of an asset for some specified period. The owner of the asset is known as lessor and the user is called lessee.
The lessee pays a fixed periodic amount called lease rental to the lessor for the use of the asset. The periodical payment made by the lessee to the lessor is known as lease rental. The terms and conditions regulating the lease arrangements are given in the lease contract. At the end of the lease period, the asset goes back to the lessor. Lease finance provides an important means of modernization and diversification to the firm. Such type of financing is more prevalent in the acquisition of such assets as computers and electronic equipment which become obsolete quicker because of the fast-changing technological developments. While making the leasing decision, the cost of leasing an asset must be compared with the cost of owning the same.
Different Types of Lease:
Depending upon the transfer of risk and rewards to the lessee, the period of lease and the number of parties to the transaction, lease financing can be classified into two categories. Finance lease and operating lease.