Capital Lease

A long-term lease in which the risk of ownership lies with the lessee and whose terms resemble a purchase or sale on installment.

If a long-term lease is a capital lease, the risks of ownership lie with the lessee. Like a mortgage payment, each lease payment is partly interest and partly a reduction of debt. For a capital lease, both an asset and a long-term liability should be recorded. The liability should be equal to the present value at the beginning of the lease of the total lease payments over the lease term. The recorded asset is subject to depreciation.

• Operating Lease