To be able to operate successfully, a

business might need to acquire assets or

capital equipment, such as plant or
machinery.
These assets may include office furniture,
computer equipment, company vehicles,
engineering machines or service equipment.
An organisation could buy all of this
equipment outright, or it may rent or lease it
instead.
Buying outright is a good option if there is
enough capital available or it is critical that the
business owns the equipment. However, large
capital expenditure can adversely affect the
cashflows of a business.
Paying for goods on hire purchase or leasing
equipment allows a business to use an asset
over a fixed period in return for regular
payments. It gives the flexibility to choose the
equipment required , with a finance company
buying it for business to use. The
maintenance of the asset is normally the
responsibility of the business

So a Lease is essentially a written agreement
under which a property / equipment owner
allows a tenant to use a Property,/equipment
for a specified period of time and specified
rent. The Lesse(the person taking out a lease
agrees to pay a no. of fixed or flexible
installments over an agreed price to the
lessor who remains the owner of the asset
throughout the period of lease.


Examples of companies that utilize leasing to acquire assets:
Companies like General Electric Capital Services, a subsidiary of
General Electric Company, which leases a broad range of
equipment, Ryder System, Inc., the truck leasing company, real
estate investment companies, and a large number of other
companies.
Who does the leasing?
Delta Air Lines leases many of its airplanes
The GAP leases most of its retail locations
Federal Express leases a portion of its delivery trucks
STEPS IN LEASING
The Entrepreneur chooses the equipment and the
equipment supplier.
The supplier provides a quotation.
The lesse submits an application to the lessor.
The lessor evaluates the Application
The lessor and the lesse sign a lease contract.
The lesse pays the advance lease payment
The lessor orders equipment from the supplier who
then delivers the equipment
The lessor registers and insures the equipment
The lesse maintains the equipment and pays the
installments as per contract

At the end of the lease period the lesse either
returns the equipment or exercises the option
of purchase in which case the ownership of
the equipment is transferred to lesse on
paying a suitable sum of money

There are mainly three types of lease
1. finance lease
2. operating lease
3. contract hire.

A finance lease is a type of lease where the lessor
has transferred the risks and rewards of
ownership to the lessee. This includes
maintenance of the asset and the risk of
obsolescence. The lessee would have to bear
these risks of ownership of the asset. In a finance
lease, the lessee would pay an amount of lease
payments which covers all or most of the cost of
the asset to the lessor. The lessee would also
have use of the asset for most of its useful life. A
finance lease would usually give the lessee an
option to purchase the asset after the lease term
at a discounted price.

An operating lease on the other hand, is a lease
where the lessor retains ownership of the asset. This
means that the risk and rewards of ownership has not
been transferred to the lessee. The lessor is liable for
maintenance payments on the asset. After the lease
period, the asset would still have a substantial
residual value left. The lease period is also usually a
minor part of the asset's useful life. An operating
lease is also easily cancellable given a short notice.
An example of an operating lease is the lease of
computers by a company. The company does not
need to pay for repairs of the computer and does not
need to worry that the computers being obsolete as
the lessor would be the one responsible for the
computers.

The key difference between a finance lease and an
operating lease is whether the lessor (the legal owner who
rents out the assets) or lessee (who uses the asset) takes
on the risks of ownership of the leased assets. The
classification of a lease (as an operating or finance lease)
also affects how it is reported in the accounts.
From an accounting point of view the classification of
leases as finance leases is very important. With a finance
lease assets must be shown on the balance sheet of the
lessee, with the amounts due on the lease also shown on
the balance sheet as liabilities. This is intended to prevent
the use of lease finance to keep the lease liabilities off-
balance sheet. In a financial lease, the lessor does not
operate the asset he leases, he merely finances it.

Over the life of the lease, the total expense reported in the
lessees income statement would be the same under the two accounting
methods. The amount of lease related expense reported in each
accounting period, however, will be different:
Year Interest
expense
Depreciation
expense
Total Rent
expense
1 0 15,000 15,000 17,208
2 4,279 15,000 19,279 17,208
3 2,986 15,000 17,986 17,208
4 1,567 15,000 16,567 17,208
Total 8,832 60,000 68,832 68,832
Contract hire Is Often used for
company vehicles. The leasing company takes
some responsibility for management and
maintenance, such as repairs and servicing.
The asset does not have to be on your
balance sheet.

A lease contract can range over a no. of years
normally between two to ten years depending upon
the cost and life of the product. It is highly beneficial
to the entrepreneur with limited resources as he can
use a piece of equipment without having to pay the
full cost of the item .
He can free up working capital for use in other areas
of business and doesn't need to take out large loans
to pay for it. It is very beneficial to lease or rent
equipment that has high maintenance costs, can
quickly become outdated, or is only used
occasionally. Leasing helps to spread the cost over a
longer period of time and match payments to the
income .It is the the leasing company which carries
the risks if the equipment breaks down

Also so far as negotiating is concerned a
leasing company can usually get better deals
on price than a small business could and will
have superior product knowledge. Leasing
affords a business access to a higher
standard of equipment, which might be too
expensive to buy outright . Also as interest
rates on monthly rental costs are usually
fixed, it is easier for a business to forecast
cashflow.


But Leasing has its disadvantages too . It can
turn out to be more expensive than if you
buy the assets outright. Besides the business
can be locked into inflexible medium or long-
term agreements. leasing agreements can
add to administrative complexities. Also
when you lease an asset, you don't own it.