Definition of Capital lease:
[Important: Accounting treatments for operating and capital leases are different and can have a significant impact on businesses' taxes.].
Fixed-term (and usually non-cancelable) lease that is similar to a loan agreement for purchase of a capital asset on installments. The lessors services are limited to financing the asset, the lessee pays all other costs including insurance, maintenance, and taxes. Capital leases are regarded as essentially-equivalent to a sale by the lessor, and a purchase by the lessee (even though the title remains with the lessor). Therefore, leased assets must be capitalized and shown in the lessees balance sheet as a fixed asset with a corresponding non-current liability (lease payable). The lessee acquires all the economic benefits (such as depreciation) and risks (such as the possibility of the loss of the leased asset) of ownership but can claim only the interest-portion (not the entire amount) of the lease payment as an expense. To be considered a capital lease, a lease must meet one or more of these four criteria: (1) title of the asset passes automatically from the lessor to the lessee at end of the lease term, (2) lease contains a bargain purchase option under which the lessee may acquire the leased-asset at less than its fair market value at the end of lease term, (3) lease term is for a period longer than the 75 percent of the estimated economic life of the asset, or (4) the present value of the lease payments is greater than 90 percent of the fair market value of the asset at the beginning of the lease term. A capital lease is a full payment lease because the lease payments pay back (amortize) the full cost (including financing costs, overheads, and profit margin) of the leased asset to the lessor, with little or no dependence on the residual (or salvage) value of the asset. Called also finance lease or financial lease. See also operating lease and sale and leaseback.
A capital lease is a contract entitling a renter to the temporary use of an asset, and such a lease has the economic characteristics of asset ownership for accounting purposes. The capital lease requires a renter to book assets and liabilities associated with the lease if the rental contract meets specific requirements. In essence, a capital lease is considered a purchase of an asset, while an operating lease is handled as a true lease under generally accepted accounting principles (GAAP).
How to use Capital lease in a sentence?
- My dad was excited because he had his capital lease and we would be buying some assets very soon for our company.
- The capital lease was upheld as it was a valid contract that indicated the terms clearly and directly between the parties.
- You may need to get out of your capital lease and will have to hope that the renting party will be fair about it.
Meaning of Capital lease & Capital lease Definition