Posted in Finance, Accounting and Economics Terms, Total Reads: 63
Definition: Operating Lease
Operating Lease is a type of contract, in which the owner of an asset, also known as lessor rents his/her asset to another person, also known as lesse for using the asset. However, this type of renting or leasing of asset is always for a shorter duration i.e. duration shorter than the lifetime value of the particular asset.
As the lessor has given his assets to the lesse on rent, the lesse has to give monthly payments to the lessor for using that asset. Generally, there are two types of Lease, Operating Lease and Permanent Lease
Advantages of Operating lease
• Once the asset is leased, it is not recorded as asset in the balance sheet, in fact it is accounted as a rental expense. And this is termed as ‘off balance sheet financing’.
• Operating leases have tax benefit.
• It helps in improving the Cash Flow.
• It also helps in improving the financial ratios.
• It is helpful in a business wherein assets are to be replaced on a regular basis. For example, Automobiles.