What is Leases
Leases means that you give some one something on rent.
What are Types of leases
There are mainly two types of leases one is finance lease and other is operation lease. Under finance lease the risk and reward are transferred to buyer where under operating lease such risks and rewards remain with seller. the classification of lease is decided at the time of lease agreement. lease of land is normally considered to be operating lease because economic life of land is indefinite.
Conditions for finance lease
The following condition must be fulfill to classify the lease as finance lease
- Risks and rewards has been transferred to buyer
- Buyer uses the major economic benefit of the asset
- Buyer has option to buy the asset at end of lease term
- asset can only be used by buyer because of special nature
- buyer can cancel the lease during the lease term
Accounting of Finance and operating leases
- under finance lease the asset is recognized in the books of lessee where under operating lease asset appear in book of lessors.
- Under finance lease lessee charge the depreciation expense for leased asset under operating lease no depreciation is charged by lessee.
- Under finance lease
- Under operating lease rental is treated as expense in book of lessee.
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