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Accounting And Finance For Managers Assignment Of Lease

Table of Contents

Difference between two basic forms of lease viz. operating lease and finance lease are mainly on the basis of who owns the leased asset, what accounting and tax treatment are given, who bears the expenses and running costs, whether purchase option is there or not and what is the lease term.

 

Difference Between Financial Vs. Operating Lease:

The differences are explained with help of the following table against various aspects of each of the operating and financial lease.

Aspects of DifferenceOperating LeaseFinancial Lease

Definition

A lease in which all risks and rewards related to asset ownership remain with the lessor for the leased asset is called operating lease. In this lease, the asset is returned by the lessee after using it for lease term agreed upon. Read Operating Lease for an in-depth coverage.In financial lease (Also known as a capital lease), the risks and rewards related to ownership of asset leased are transferred to the lessee. Read Finance Lease for an in-depth coverage

Ownership

The ownership of the asset remains with the lessor for the entire lease period.Ownership transfer option at the end of the lease period is there with the lessee. The title might or might not be transferred eventually.

Accounting Effect

Operating lease is treated generally like renting. That means, the lease payments are treated as operating expenses and the asset does not show on the balance sheet.A financial lease is treated like loan generally. Here, the asset ownership is considered by the lessee and so asset appears on the balance sheet.

Purchase Option

In operating lease, the lessee does not have an option to buy the asset during the lease period.A financial lease allows the lessee to have a purchase option at less than the fair market value of the asset.

Lease Term

Lease term extends to less than 75% of the projected useful life of the leased asset.Lease term is generally more than or equal to the estimated economic life of the asset leased.

Expenses Borne

Lessee pays only the monthly lease payment in operating lease.In a financial lease, lessee bears insurance, maintenance, and taxes.

Tax Benefit

Since operating lease is as good as renting, the lease payment is considered an expense. No depreciation can be claimed.The lessee can claim interest and depreciation both as a financial lease is treated as a loan.

Running Cost

In operating lease, no running or administration costs are to be borne. For example, registration, repairs etc. since it gives only right to use the asset.In a financial lease, running cost and administration expenses are higher.

Example

Normally, A Projector, Computers, Laptops, Coffee Dispensers etcNormally, Plant and Machinery, Land, Office Building etc

Last updated on : March 10th,
 

ASSIGNMENT ON FINANCIAL AND MANAGEMENTACCOUNTING

Truck $10, purchase price of the truck. Less depreciation $ 1, amount deducted asa depreciation expense Net Truck: $ 9, net book-value of the woaknb.wz.sk $ simply represents the book value of the truck after depreciation has beenaccounted for. This figure says nothing about other aspects that affect the value of an itemand is not considered a market price.

Dual Aspect:

This concept is the basis of the fundamental accounting equation:

Assets = Liabilities + Equity

woaknb.wz.sk are what the company ownsLiabilities are what the company owes to creditors against those woaknb.wz.sk is the difference between the two and represents what the company owes toits investors/woaknb.wz.sk accounting transactions must keep this equation balanced so when there is an increaseon one side there must be an equal increase on the other side or an equal decrease on thesame side.

Objectivity:

The objectivity concept states that accounting will be recorded on the basis of objectiveevidence (invoices, receipts, bank statement, etc…). This means that accounting recordswill initiate from a source document and that the information recorded is based on fact andnot personal opinion.

Time Period:

This concept defines a specific interval of time for which an entity’s reports are prepared. This can be a fiscal year (Mar 1 – Feb 28), natural year (Jan 1 – Dec 31), or anyother meaningful period such as a quarter or a month.

Conservatism:

This requires understating rather than overstating revenue (income) and expenseamounts that have a degree of uncertainty. The rule is to recognize revenue when it is

RAHUL GUPTA, MBAHCS (1

ST

SEM), SUBJECT CODE- MB, SET-1Page

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