See Also:
Sale and Leaseback
Capital Lease Agreement
Lease Term
Make-or-Buy Business Decision
Cost Driver
Lessee Defined
In a lease agreement, the lessee is defined as the party that pays for the use of the asset or property. The lessor is the party that receives payments from the lessee in exchange for the usage of its asset or property.
Lessor Defined
In a lease agreement, the lessor is defined as the party that receives payments in exchange for the usage of its asset or property. The lessee is the party that pays the lessor for the use of the asset or property.
Lessor versus Lessee
What’s the difference between lessee vs lessor? When you sign a lease, are you the lessor or lessee? When engaging in a lease agreement, a legally binding contract, it is important to know the difference between these two terms.
For example, consider a rental apartment. The tenant is the lessee. And the landlord is the lessor. The lessee pays rent to the landlord whereas the lessor receives payment from the tenant. The same is true for any lease or rental agreement. The lessee pays the lessor for the right to use the asset or property. In addition, the lessor receives payment from the lessee in exchange for the usage of the asset or property.
Operating Lease vs Finance Lease
In accounting, a distinction is made between an operating lease versus a finance lease. The difference is in the way the lease is recorded by the lessee in the lessee’s financial statements. There is also a difference in which party assumes the benefits and responsibilities of ownership of the asset or property.
Operating Lease Definition
An operating lease is a short-term off-balance-sheet lease agreement. An operating lease is not recorded on the lessee’s balance sheet. This type of lease typically spans a small portion of the asset’s useful life, and the lessor retains the risks and benefits of ownership. For example, in an operating lease, the lessor is responsible for service and maintenance of the asset throughout the duration of the lease. An operating lease is also called a service lease.
Finance Lease Definition
A finance lease, also called a capital lease, is a type of long-term lease agreement. A capital lease is recorded on the lessee’s balance sheet. Additionally, 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 or property, assumes both the risks and benefits of ownership.
