Question

Question: Compare and contrast an operating lease with a capital Lease

Short answer

Answer

An operating lease is a cancelable lease in which risk and rewards remain with the lessor. In contrast, in the case of a capital lease, it is noncancelable, and therisks and rewards are transferred to the lessee.

Step-by-step solution

Meaning of Lease

Lease refers to an agreement between the two parties, the lessor and the lessee, that the lessor or the asset owner provides a right to use his asset for a particular period by paying the cash, i.e., the rent

Comparing the capital lease with the operating lease

S.NO.	Capital Lease	Operating Lease
1	Generally, the capital lease contracts are for long-term	Operating leases are for short-term tenure
2	Risk and Reward transfer to the lessee	Risk and Reward remain with the Lessor
3	The lessee report the leased item as an asset or a liability	The lessee does not report the leased item as an asset or a liability
4	Depreciation and Interest expenses are recognized in the books of the lessee.	Rental expenses are recognized in the books of the lessee.
5	A bargain purchase option is available in case of a capital lease.	A bargain purchase option is not available in the case of an operating lease.