What is an Operating Lease?
An operating lease is a type of lease agreement in which the lessee (the party renting the asset) obtains the right to use an asset for a specific period of time, but does not assume ownership of the asset. Operating leases are typically used for short-term rentals of assets such as vehicles, equipment, and real estate.
Under an operating lease, the lessor (the party owning the asset) retains ownership of the asset and is responsible for maintaining and repairing it. The lessee is responsible for paying a regular lease payment to the lessor in exchange for the right to use the asset.
Operating leases are typically accounted for differently than capital leases. Under generally accepted accounting principles (GAAP), operating leases are not recorded on the balance sheet as an asset or liability. Instead, the lease payments are recorded as operating expenses in the income statement.
There are several advantages to using operating leases, including:
- Flexibility: Operating leases allow the lessee to obtain the use of an asset on a short-term basis, without the commitment of a long-term lease or purchase.
- Cost savings: Operating leases may be less expensive than purchasing an asset outright, as the lessee does not need to pay for maintenance, repairs, or other ownership costs.
- Simplicity: Operating leases are typically simpler to manage and account for than capital leases or purchases, as the lessor is responsible for the asset.
Operating leases are a useful tool for businesses that need to obtain the use of assets on a short-term basis without the commitment of ownership.