Redact Legal California Equipment Lease Forms For Free

The key difference between the two types of leases is the extent to which the lessee assumes the risks and benefits of ownership. In an operating lease, the lessor retains ownership and most of the risks and benefits of ownership, while in a finance lease, the lessee assumes ownership-like risks and benefits.

The lessee records the leased right as an item of property, plant, and equipment, which is then depreciated over its useful life to the lessee. The lessee must also record a liability reflecting the obligation to make continuing payments under the lease agreement, similar to the accounting for a note payable.

An equipment lease agreement is a contractual agreement where the lessor, who is the owner of the equipment, allows the lessee to use the equipment for a specified period in exchange for periodic payments. The subject of the lease may be vehicles, factory machines, or any other equipment.

Typically, assets rented under operating leases include real estate, aircraft, and equipment with long, useful life spans?such as vehicles, office equipment, or industry-specific machinery. Essentially, an operating lease is a contract for a company to use an asset and return it in a similar condition to the lessor.

The two most common types of leases are operating leases and financing leases (also called capital leases). In order to differentiate between the two, one must consider how fully the risks and rewards associated with ownership of the asset have been transferred to the lessee from the lessor.

Let's review each type in more detail, starting with operating leases and finance leases, the two basic types of equipment leases, or, more specifically, the two basic types of lease classifications. From there, we'll dive into lease classifications that fall within the two most basic types.