Lease can be defined as a contract where one party which uses the asset agrees to pay rent for the use of that asset to the proprietor of that asset. In accounting terms person who uses the asset is called the lessee and owner of asset is called lessor. An example of operating lease would be when a person is starting his or her own manufacturing business but he or she does not have enough cash to buy machinery then the person will take machinery on operating lease. Operating lease is that lease which allows lessee to use the assets for short period of time. Given below are some of the features of operating lease –
- Operating lease is a short term arrangement for the use of asset between the lessee and the owner of the asset.
- Various costs related to that asset like maintenance, taxes etc…. are paid by the owner of the asset.
- The term of operating lease is always shorter than the economic life of that asset.
- The lessee can cancel the operating lease prior to the end date of the operating lease.
- The terms related to an operating lease can vary significantly depending upon the agreement between the lessee and the owner of the asset.
- The rent which is paid by the lessee for the duration of the operating lease is lower than the cost of asset.