Definition
A lease is an agreement, or contract, entered into by two parties. The lessor is the party that gives the lessee the right to use the asset or property, while the lessee is the party that agrees to pay the lessor for the use of the property or asset.
Explanation
The most common lease agreement in the corporate environment is the lease on a building or facility. There are two basic kinds of leases:
Capital Lease: this type of lease involves the use of an asset over most of its useful life, therefore the arrangement is similar to a long term financing agreement.
Operating Lease: in this type of lease, the lessor grants the lessee the use of the property for a limited period of time, while the risks and rewards of ownership continue to reside with the lessor.
A lease is considered a legal contract. As such, the terms and conditions in the agreement commonly include:
The exact property to be leased
Names of the lessee and lessor, and any other party to the contract
Duration of the lease, including both the start date as well as its duration
Payment schedule, including any upfront money such as a security deposit
Identification of responsible parties for maintenance and expenses associated with the property
A dispute settlement process, including the return of money held as a security deposit
Related Terms
The Financial Accounting Standards Board rules allow companies two methods to account for leases. If the agreement meets any of the following conditions, the lease should be treated as a capital lease, also known as a finance lease:
Moneyzine EditorNovember 6th, 2024- The financial accounting term operating lease is used to describe one of several lease arrangements that a company can hold. Operating leases are used to acquire assets on a relatively short-term basis. The cost of an operating lease appears as an expense on the income statement.Moneyzine EditorNovember 6th, 2024
The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:Moneyzine EditorNovember 6th, 2024
The term leasehold is used to describe the contractual agreement between the lessor and lessee. The leasehold agreement grants the lessee the right to use of a specific property, for a specific period of time, in return for the agreed-to payment terms.Moneyzine EditorNovember 6th, 2024
The financial accounting term leveraged lease refers to leased property that is partially financed by the lessor with money borrowed from a financial institution. In a typical leveraged lease, the lessor may finance 20 to 40% of the property's purchase price, while creditors provide funding for the balance of the property's cost.Moneyzine EditorNovember 6th, 2024
