Leasing is the process where the owner of the asset give the right to use of an asset to other person known as lessee, however the ownership remain with the owner of the asset known as Lessor. Given below are the advantages and disadvantages of leasing-
Advantages of Leasing
- Since Lessee has to give rent only for the asset he or she gets the advantage of using the asset without incurring any substantial cost of purchasing the asset.
- Since lease rentals are debited to profit and loss account which in turn leads to reduction in profits and hence the person who has taken the asset on lease can show lower taxable income for the period for which the asset has been taken on lease.
- A person who does not want to part with his or her asset but still want to earn income from it can give that asset on lease and after the lease period is over the asset comes back in possession of the owner.
- Lessee can get additional loan from bank or finance institution because this asset does not come on the liability side and hence the lessee can leverage the balance sheet for taking loans for investing into the business.
Disadvantages of Leasing
- If owner of the asset goes into liquidation then asset of the owner will be taken or liquidated by the creditors and hence they will take the asset from lessee in between which in turn will result in discontinuation of the work for which the asset was taken on the lease by lessee.
- There are strict terms and conditions attached to the use of asset in leasing and hence it cannot be used for other purposes, in other words there is less flexibility when it comes to leasing and therefore a limitation of leasing.
- Lessee cannot claim depreciation for the asset and therefore if the person wants to use for long period of time then it is better to buy the asset rather than taking it on lease.
- As one can see from the above that leasing has both advantages as well as disadvantages and hence person should look into above points before deciding whether to buy or lease an asset.