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Finance & Accounting
Pages 2 (502 words)
Leasing is a process by which the lessee pays the lessor certain amount of money to use home machinery, equipments and other assets for a specified period of time. At the end of the contract the leaser may be able to purchase the item with the amount of money previously paid…
There are two main types of leases namely; financial and operating lease. A financial lease is where the company possess the asset throughout the lease period; the lessee may not sell the property during the period of a lease. On the other hand, operating lease involve a lease that is utilized if the asset has a resale value, the lessor carries out the risk associated with the lease till the end of the period (Stevens,p.188).
Commercial lease agreement such as real estate involves the following components: names of the tenant, this involves the first and the last names of the tenant. The lease agreement also involves terms of the lease. Lease term is the length of time/time frame when the contract between the lessee and the lessor is expected to expire, upon which the lessee may renew the agreement. Another component involves rent to be paid. The amount of rent that the tenant (lessee) should pay to the landlord (lessor) should be clearly be specified as well as the due date for payment. In addition, the responsibilities of the parties involved in a lease agreement should be clearly be defined to avoid conflict between the lessee and lessor. For example, it should explain when and who should make repairs of the premises or the property. The intended use of the property should be clearly be stipulated in the agreement (Martikainen, Kimmo and Jenni, p.95).
There are various financial benefits that may accrue to a business for leasing of property. Among those benefits include: lease may allow a business with less capital to grow because it allows the business to use lease property to earn profits. In addition, a lease helps an organisation to secure its cash flows by paying for the property as it earns profits. Deprecation of equipment is treated different in financial reports. In addition, lease payment has different tax treatment. For example, lease payments are treated as expenses when preparing financial ...
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