Capital Lease vs Operating Lease

Lease is agreement between owner of property and the person who wants to use of same property. It is contract of rent of any fixed asset.

1. Definition

Capital lease is the lease on the basis of rules

1) Ownership of asset will transfer at the end of lease

2) It allows lessee to buy same leashold asset the price less than fair market value at the end of lease.

In operating lease, there is not such rule. Both reward and risks will be of owner instead lessee.

2. Plan

Capital lease is the plan to buy asset in the installment

So, lease property will be an asset and  if there will be any default, it will be liability of lessee.

Operating lease is just agreement of rent property. Ownership will not transfer. All default in property will be of owner. He is responsible and it is his liability.

3. Lease Term

In Capital Lease

75% of total active life of asset must be under lease term. Means capital lease contract should not short term. It should be long term. It is condition.

In Operating Lease

In operating lease, lease contract may be short term.

4. In Financial Statement

In Capital lease 

We will show total value of asset in balance sheet as fixed asset

For example, asset value is Rs. 10,00,000

It will be shown in the asset side in the beginning of lease agreement and same amount will be as liability by showing lease payable account

In operating lease

We will not show it in balance sheet of lessee. We will show only in income statement. When we pay the lease amount, it will be expense like paying of other operating  expenses like rent, internet bill and electricity bill.

5. Installment Rule

In capital lease

When we pay the lease amount, it will apply installment rule

following entry will pass

In above example, we have taken capital lease of machine of Rs. 10,00,000. We have decided to pay Rs. 5000. Now, because at the end of lease, this will be the asset of lessee. So, lessee will show installment as ( principle + interest ) like payment of any other loan.

lease payable account debit

interest account Credit (interest on principle )

Bank account Credit ( Principle of installment )

In operating lease

This rule will not apply

Related : Journal Entries of Lease 






access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar Control Your Spending corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation Diwali Messages documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Finance Journal Entries Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps Google Adsense google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. GST guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting Intangible interest international Internet Introduction of Tally 9 inventory investment investment in Shares invoice IT Japan Job costing journal entries Journal Entries eBook Help Kalculate keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting Online Accounting Course otcei pakistan parents Partnership pay pal pdf Personal Finance pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance truthfulness tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching Wealth wikipedia working capital youtube
Accounting Education: Capital Lease vs Operating Lease
Capital Lease vs Operating Lease
Accounting Education
Not found any lecture VIEW ALL Continue reading Reply Cancel reply Delete By Home PAGES Lectures View All RECOMMENDED FOR YOU Category ARCHIVE SEARCH ALL Lectures Not found any lecture match with your request, please help to write it and send it to our email at for making this website free accounting and finance encyclopedia. Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock