Difference between Financial and Operating Lease

Lease basically is of two types one is called financial lease and other is operating lease, let’s look at the differences between financial operating lease in order to get a better understanding about both financial and operating lease –

  1. While financial lease is a long term arrangement between the lessee (user of the asset) and the owner of the asset, whereas operating lease is a relatively short term arrangement between the lessee and the owner of asset.
  2. Under financial lease all expenses such as taxes, insurance are paid by the lessee while under operating lease all expenses are paid by the owner of the asset.
  3. The lease term under financial lease covers the entire economic life of the asset which is not the case under operating lease.
  4. Under financial lease the lessee cannot terminate or end the lease unless otherwise provided in the contract which is not the case with operating lease where lessee can end the lease anytime before expiration date of lease.
  5. While the rent which is paid by the lessee under financial lease is enough to fully amortize the asset, which is not the case under operating lease.
9 comments… add one
  • BANUPRASATH V

    very simple words

  • NANDHINI.S

    Hello sir!I have a doubt in which lease,the lessee can buy the asset? and will the lessee become the owner at the end of the lease period

    • naveed

      it is very simple in financial lease the hiring asset company can purchase the asset. lessee will be the owner after purchasing the asset.

  • BANU

    Easy to understand

  • maiquocquynh

    clearly understand

  • Anand

    Please tell me how both these lease affect the Balance Sheet. Do you get to claim depreciation in terms of financial lease? Can you claim the amount paid towards the financial lease as operating expense?

    • Ahmad

      Hi Anand. Only Finance lease affects the Balance sheet. The payments paid on Operating lease are shown in P & L account as an expense.

      1. Leased asset – Depreciation (Depreciation = Capital amount / Lease term)

      2. Current liabilities = Installment in Year 2 – Interest in year 2

      3. Long term liabilities = Total Installments – Total interest (Start from year 3 till the end of lease term)

      Hopefully you can understand it….

  • moitlamo omet phale

    It took me only 2minutes to understand this, whereas it tookme more than 5 lessons to understand it in class

  • Yagya

    Will you please clarify this with an example. For example A leases its land to B on which B constructs a building for 3000000 on condition that after 30 years the building will be property of A. B pays 100000 to A every rent every year. In this case who will claim depreciation ?
    regards
    yagya

Leave a Comment


Related pages


wajiha meaningadvantage of hire purchaserent revenue journal entrywhat is skimming pricing in marketingcharacteristics of autocratic leadershipadvantages of lifo inventory methodconsumer durable goods examplesdisadvantages of perfect competitionfactors influencing elasticity of demandmeaning of loan syndicationdescribe the limitations of the barter systemdisadvantages of a bank loanpayback period advantages and disadvantagesexample of three column cash bookpassed adjusting journal entrythree golden rules of accountingmixed economy advantages disadvantagesinternational trade disadvantagesadvantages of authoritarian leadershiphorizontal integration benefitsmerits and demerits of nationalizationwhat is direct and indirect quotationexamples of products with elastic demanddefine a mixed economyadvantages and disadvantages of zero based budgetingunqualified audit opinionsocial networking advantages and disadvantagesexample of unqualified audit reportdifference between factoring and discountingdrawer & draweeadvantages of barter trade systemcharacteristics of oligopolyratio analysis advantageswhat is the meaning of bearer chequewhat are autocratic leaderspricing skimmingexample of a conglomerate mergerclr and slrdefinition of conglomerate in economicswhat is the meaning of cross chequedifference between macro & micro economicsfmcg companies full formthe disadvantages of globalisationpros of autocratic leadershipoligopoly and its featuresunearned rent revenue balance sheetwhat is the difference between accounts receivable and accounts payablepenetration pricing strategy examplefull form of bhelbad debts entrycore product augmented productunbilled revenue journal entrycomplementary goods and substitute goodssocial media merits and demeritsmerchant banking vs investment bankingprestige pricing advantages and disadvantagesdebtureadvantages and disadvantages of pricing strategiesexample of conglomerate diversificationadvantages and disadvantages of jitmixed economy wikireducing balance method depreciationcentrally planned economy definitioncharacteristics of authoritarian leadership stylejournal entry of loan taken from bankdiminishing method of depreciationdefine current liabilitiesficitiouscomplementary goods definition economicsconsignor and consigneeadvantages and disadvantages of functional organizational structureadvantages of swot analysisagro based industries definition