Meaning of lease A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments. There are two parties in a lease agreRead more
Meaning of lease
A lease is an agreement or a contract in which the right to use an asset like land, building, or machinery is given by one party to the other party for a fixed period of time against the consideration of a single payment or a series of payments.
There are two parties in a lease agreement:
- Lessor: The party who gives the right to use its asset in return for a series of payments or a single payment.
- Lessee: The party who receives the right to use the asset from the Lessor.
This is similar to a rent agreement or contract. The only difference between lease and rent is duration. A rent agreement is generally for less than 12 months while a lease agreement is for more than 12 months like 5 years or 10 years, sometimes even for like 99years.
Type of lease
There are two types of lease:
- Operating lease
- Finance Lease
Operating lease
- An operating lease is a type of lease in which the possession of the leased asset is transferred back from the lessee to the lessor at the end of the lease period.
- Here, all the risk and rewards incident to ownership remains with the lessor, not the lessee.
- The depreciation on the leased asset in case of operating lease is not charged by the lessee to its profit and loss account as the leased asset is not shown in the balance sheet. A leased asset is an off-balance sheet item in the case of an operating lease.
Finance lease
- Unlike an operating lease, the ownership of the leased asset is transferred to the lessee at the end of the leased period.
- Thus, at the inception of the lease agreement, all the risk and rewards incident to ownership is transferred from the lessor to the lessee.
- The depreciation on the leased asset is charged by the lessee to its profit and loss account as the leased asset is shown in the balance sheet. A leased asset is a balance sheet item in the case of an operating lease.
- Along with the leased asset, the obligation to pay the future lease payment is also shown in the balance sheet as a non-current liability or current liability as the case may be.
Difference between operating lease and finance lease in tabular format
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One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll beRead more
One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll be explaining internal users of accounting information in detail.
Internal users are people within an organization/business who need accounting information to make day-to-day decisions.
The various internal users of accounting information include:
Owners are the people who contribute capital to the business and therefore they are interested to know the profit earned or loss incurred by the business as well as the safety of their capital. In the case of a Sole Proprietorship, the proprietor is the owner of the business. In the case of a Partnership, the partners are considered as the owners of the firm.
The use for them: To know how the business is doing financially, owners need to know the profit and loss reflected in the financial statements.
Management is responsible for setting objectives, formulating plans, taking informed decisions, and ensuring that pre-planned objectives are met within the stipulated time period.
The use for them: To achieve objectives, management needs accounting information to make decisions related to determining the selling price, budgeting, cost control and reduction, investing in new projects, trend analysis, forecasting, etc.
Employees and workers are the ones who implement the plans set by the management. Their well-being is dependent on the profitability of the business.
The use for them: They are interested to check the financial statements so that they can get a better knowledge of the business. Some organizations also give their employees a share in their profits in the form of a bonus at the year-end. This also creates an interest in the employees to check the financial statements.
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