Capital Lease Agreement
A capital lease is a type of long-term lease agreement. A capital lease is recorded on the lessee’s balance sheet. This type of lease typically spans most of the useful life of the asset. In a capital lease agreement, the lessee, the party receiving the asset, assumes both the risks and benefits of ownership. Also call a capital lease a financial lease or finance lease.
Capital Lease Treatment
According to GAAP, property leased with a capital lease agreement must be recorded on the lessee’s balance sheet. Record the leased property as an asset with a corresponding liability. Then depreciate the asset. The liability is amortized. Payments of the interest and principal are considered separate expenses on the income statement.
3. The duration of the lease spans at least 75% of the asset’s useful life.
Finance Lease versus Operating Lease
2. With a capital lease, the lessee assumes both the risks and benefits of owning the asset. With an operating lease, the lessor retains the risks and benefits of owning the asset throughout the duration of the lease.
For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.