What is Capital Lease?
A capital lease, also known as a finance lease, is a type of lease agreement in which the lessee (the party renting the asset) is considered to have acquired the ownership of the asset by the end of the lease term. This is in contrast to an operating lease, in which the lessee only has the right to use the asset for a specific period of time without acquiring ownership.
In a capital lease, the lessee is responsible for paying the entire cost of the asset over the term of the lease, including any financing costs. The lessee is also responsible for maintaining and repairing the asset and may be required to pay for any insurance or taxes related to the asset.
Capital leases are typically used for longer-term leases of assets such as real estate, vehicles, or equipment. They are often used as a way to finance the acquisition of an asset, as the lessee can spread the cost of the asset over time rather than paying for it upfront.
From an accounting perspective, capital leases are treated differently than operating leases. In a capital lease, the lessee is required to recognize the asset and the related debt on its balance sheet, while in an operating lease, the asset and related debt are not recognized on the balance sheet. This difference in treatment reflects the fact that in a capital lease, the lessee has acquired ownership of the asset and is responsible for its maintenance and repair, while in an operating lease, the lessee only has the right to use the asset and is not responsible for its maintenance or repair.