Big changes are coming to the accounting world. A rule change that was proposed last February is coming into effect this month, and this rule change affects how different kinds of leases are tallied up on corporate balance sheets. But while this rule is making things difficult for accountants, for an accounting student, you may be asking: How many different types of leases could there be?
The rule change affects two different kinds of leases: operating and finance. The biggest difference between these two types of leases is what happens at the end of the lease. In an operating lease, the object being leased returns to the owner of the object. In most finance leases, the object ends up being owned by the lessee, or being purchased at the conclusion.
Another major difference between the two types of lease is the way in which the lessor makes its money. In operating leases, the lessor charges the company more than is required for the lessor to make its own payments on the object. In finance leases, the lessor invest the money received from the lessee, in hopes of making interest on those payments.
From an accounting perspective, operating leases are able to be included in the operating expenses of a company, making them deductible from profits. Finance leases treat the object being leased as if it were owned by the lessee, which prevents the costs associated with the lease from being treated as operating expenses, and instead as an asset.
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