Lease basically is of two types one is called financial lease and other is operating lease, let’s look at the differences between financial operating lease in order to get a better understanding about both financial and operating lease –
- While financial lease is a long term arrangement between the lessee (user of the asset) and the owner of the asset, whereas operating lease is a relatively short term arrangement between the lessee and the owner of asset.
- Under financial lease all expenses such as taxes, insurance are paid by the lessee while under operating lease all expenses are paid by the owner of the asset.
- The lease term under financial lease covers the entire economic life of the asset which is not the case under operating lease.
- Under financial lease the lessee cannot terminate or end the lease unless otherwise provided in the contract which is not the case with operating lease where lessee can end the lease anytime before expiration date of lease.
- While the rent which is paid by the lessee under financial lease is enough to fully amortize the asset, which is not the case under operating lease.