Introduction:
Leases are the contractual agreement among the lessor (the owner of assets) and the lessee, where the former party allows the latter to use the assets for a specified period of time in lieu of lease payments.
It is important to note that leases are classified as Operating Leases and Capital Leases. A Capital lease refers to purchase of an asset owned by lessor by using debt financing. Thus, at the inception of a lease, the lessee will add equal amounts of both asset and liability on the balance sheet. Since, the asset is purchased through debt financing, lessee will ...