Accounting Essay Example | Topics and Well Written Essays - 1000 words - 1

Accounting - Essay Example Even though, leased assets are not legally owned by lessee, he has the right over the leased assets to make use of and earn profits out of it and hence it should come under the asset side of the balance sheet. Understanding characteristics of leased assets and its accounting standards would be helpful to identify the best method of treating leased assets. Leasing is an agreement between two parties, namely lessor and lessee, for the hire of an asset. By the agreement, the lessor provides the lessee with the right to use and make profits for the agreed period and the lessee pays a lease rental to the lessor in return for the use of asset. The lessor is regarded to be the legal owner of the asset who rents out the asset to the lessee. Normally, at the end of the leasing period the asset is given back to the lessor. Being the owner of the leased property, the lessor in real meanings allows the lessee quiet enjoyments only if the lessee continues to fulfill the obligations. This simple accounting behavior itself outlines the best method of treating leased assets in the balance sheet. On the event of a default, the lessor has a right to repossess the property and a duty to remarket the leased property. For accounting treatment purposes, leases are classified in to two, ‘finance lease’ and ‘operating lease’. An operating lease is a very short term agreement for the temporary hiring of a particular asset. A finance lease is a long term agreement that represents a loan made by the lessor to the lessee to buy the asset. In this lease, risks and rewards of the ownership of an asset will be substantially transferred to the lessee. It is considered to be a rental agreement and legally the lessee has not bought the asset because the title remains with the lessor. However, it is highly important that the commercial reality of events and accounting transactions need to be reported in the financial statement. Simon Benninga emphasizes that accounting experts