Operating Lease

What is an Operating Lease?

Operating leases are used by a business to rent equipment on a short term basis. The person renting the equipment (usually a business) is called the lessee, and the person who owns the equipment (usually a finance or equipment leasing business) is called the lessor.

The lessee pays a periodic rental payment to the lessor for the use of the equipment. The rental payments are not expected to cover the full cost of the equipment and normally include other services such as equipment maintenance.

The rental period is normally significantly shorter than the expected life of the asset. At the end of the operating lease the equipment would be expected to have a residual value and be returned to the person who owns the equipment, who would then rent out it again.

Under an operating lease the risks and rewards of ownership remain with the lessor, and for accounting purposes the rental payments are simply treated as an operating expense in the income statement of the lessee.

Our tutorial on operating lease accounting explains in detail how operating leases are treated in the financial statements of a business.

For further information see the Wikipedia operating lease definition.

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Last modified March 23rd, 2016 by Team

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