Definition of Financial lease
Lease is a legal contract in which one party according to the contract agrees to convey property, land, fixed asset or services to another for a specified period of time in return on periodic payment.
The grantor is called lessor.
The other party is called lessee.
The periodic payments are called lease payments.
Brief Explanation of Financial lease
Hence lease is an agreement in which lessor allows lessee to use his asset on the cost of payment over a period of time.
Types of Leases:
There are two types of lease
– Operating lease
– Financial lease
– It is also known as capital lease is a a type of lease in which the ownership remains in the name of lessor during the life of the lease
– The ownership however maybe transferred to the lessee at the end of the lease.
– The lessee pays periodic rentals and at the end of lease (if want to purchase the asset) pays a nominal principal amount and transfer ownership on his name.
– Lessee is also allowed to sell the asset to a third party rather than purchasing it himself.
– Financial lease payments are accounted for as an asset in books as the lessee receives the asset at the end of lease contract.
– Lessee is normally responsible for the administration and maintenance of the asset.
– All the risk and reward is transferred to the lessee in the financial lease.
Benefits of Financial lease:
– The lessee does not have the need to purchase the asset instead he can use the asset on the cost of periodic payments.
– If not much capital is available to purchase the asset.
– The money saved by not purchasing the asset can be used somewhere else for investment and profit purposes
– Lease payment is a tax deductible amount.