What is lease?

A legal document outlining the terms under which one party agrees to rent property from another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the lessor (the property owner) regular payments from the lessee for a specified number of months or years. Both the lessee and the lessor must uphold the terms of the contract for the lease to remain valid.

Types of Leases

Operating Lease: An operating lease is basically a. rental agreement. The lessee records rent expense for each of the lease payments.

Capital Lease: A capital lease is a rental agreement in form, but the substance of the transaction is an asset purchase. With capital leases, the lessee records and asset and related liability rather than rental expense. The lessee also record depreciation on the If a lease agreement meets any one of the following criteria, it is considered to be a capital lease:

  1. The lease term is equal to 75% or more of the life of the asset.
  2. The present value of the minimum lease payments is equal to at least 90% of the cost of the asset.
  3. The lease transfers ownership of the asset to the lessee at the end.
  4. The lease contains a bargain purchase option (the option price is so low we know that the lessee will exercise the option to purchase the asset.