Lease :- a lease is a contract between the owner (lessor) and the user (lessee) wherein lessor gives right to use the asset/capital goods/equipment on payment of periodic amount to lessee.
Parties involved in Lease agreement:-
- Lessor – lessor is the real owner of asset.
- Lessee – lessee gets the right to use the asset on payment of periodic amount.
Types of Lease :-
Operating lease :- under this lease, lessor is unable to recover the full value of asset/capital goods/equipment and other related charges due to short period of lease. In addition to this, lessor also bear insurance, repair & maintenance costs etc. Operating lease, generally, prefers in the following situations:-
- When the asset is subject to rapid obsolescence.
- When the long life of asset is uncertain.
- When the asset is required for temporary use.
Finance lease :- under this lease, lessor is able to realize the value of asset/equipment due to long period of lease and title of ownership is transferred from lessor to lessee. In such lease, lessee doesn’t have option to terminate the lease agreement subsequently and bear insurance, maintenance costs. In finance lease, two types of options are available for lessee i.e. right to purchase the leased assets after the expiry of initial lease period at an agreed price & the right to share the sale proceeds of the asset after expiry of lease period.