An operating lease is a short-term off-balance-sheet lease agreement. This type of 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 operational lease, the lessor is responsible for service and maintenance of the asset throughout the duration of the lease. You can also call it a service lease.
Operating Lease Treatment
According to GAAP, property leased with this kind of lease is not recorded on the lessee’s balance sheet. Lease payments are recorded as rent expenses on the income statement.
Finance Lease versus Operating Lease
There are two main differences between capital (finance) leases and operating leases.
1. With a capital lease, the lessee must record both a lease asset and a lease liability on their balance sheet. With an operating lease, this is not required.
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.
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See also:
Capital Lease Agreement
Commercial Lease
