Introduction: According to Warren Fees in his book "Accounting" (2002), a lease is a contract for the use of an asset for a stated or fixed period of time. The two parties to a lease are the lessor and the lessee. The lessor is the party that owns the asset. The lessee is the party to whom the right to control and used the asset are granted by the lessor. In return, the lessee is obligated to make periodic payments to the lessor. Leases are classified by the lessee as either capital leases or as operating leases. A capital lease is on in which the lessee must account for the asset acquisition as if it had purchased the asset. A lease will be considered a capital lease if any of these four conditions apply: (1) The lease transfers ownership of the property to the lessee at the end of the lease, (2) The lease contains an option to purchase at less than its fair market value, (3) The total lease period exceeds 75 percent of the useful life of the asset or (4) The total lease payments exceed 90 percent of the purchase price An operating lease is similar to renting an asset (Fees, 2002). Under an operating lease, the lessee records the payments under the lease by debiting rent expense and crediting cash.
According to Lyn Frazer in her book "Understanding Financial Statements" (1995), there are a number of reasons for a company to consider a capital lease rather than the outright purchase of an asset. One reason is that monthly capital lease payments are often lower than monthly purchase payments, enabling the lessee to conserve itsácash and its credit lines. Another reason to consider leasing is flexibility. Unlike purchasing an asset, leases can often be structured more creatively so that repayment schedules match the lessee's unique business conditions. Therefore, when an organization is looking for more flexibility in the repayment schedule, a lease might be a better option. For example, a le
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