What Is An Operating Lease Agreement

The classification of a lease as a finance lease or as an operating lease is based on whether the risks and opportunities for ownership are transferred to the tenant. This can be subjective and it is important that the lease is carefully reviewed. In contrast, a capital lease is more like a long-term loan or property. The asset is treated as the licensee`s property and is recognised on the balance sheet. Finance leases are counted as debts. They depreciate over time and incur interest charges. Other features include: – the customer enters a secondary lease period An entity that leases an asset under the operating lease agreement must classify each lease payment as a rental expense by debiting its rental cost account and crediting it to its rental liability account. .