Companies acquire their fixed asset in some different ways. Rather than simply purchase their fixed asset, some companies may choose to lease theirs. You record purchased fixed assets at their cost (purchased amount plus any expenditures related to the purchase,) how about leased ones? How to account fixed assets acquired by leasing?

Leases can be classified into two categories: (a) operating; and (b) capital lease. Companies may enter into one of them or both in acquiring their assets.

A lease is called as an “operating lease” if it is recorded as an expense in the book, and “capital lease” when it is recorded as assets on one side and lease liability in the other side of the book. Piece of cake, isn’t it? Not really. Though, Generally Accepted Accounting Principles require that the recording of a transaction reflect its true economic nature, not its form. The accounting for leases, however, has been a huge obstacle in the side of accounting standard-setters for at least five decades. From the beginning, the crucial issue has been how to require companies to report leased assets and lease liabilities in the balance sheet when a lease constitutes an effective transfer of ownership. Before going forward, let’s have a look at the two major lease classification first. Read on…