Finance Lease

A finance lease involves repayment to the lessor by the lessee of the full cost of the asset together with nominal interest. As such, a lease of this type is normally non-cancellable, or cancellable only under certain conditions and the lessee enjoys substantially all the risks and rewards associated with the ownership of an asset, other than the legal title.

Operating Lease

An operating lease involves the lessee paying a pre-determined rental for the use of an asset for a period of time which is normally substantially less than the economic life of the asset. The lessor retains the risks and rewards of ownership of the assets. At the end of the lease term, the lessor assumes possession of the equipment and leases it to another interested party.

Fair Market Value

This is the price a willing buyer would pay and a willing seller would accept (neither buyer nor seller being under compulsion to act) for the equipment, taking into account the equipment's condition, utility, revenue-producing capability and replacement costs.

Residual Value

The market value of the lease equipment at the end of the lease term.

Depreciation

The process of apportioning the value of a fixed asset over its useful life according to each company's policy. The periodic depreciation expense is charged off as an expense and provides tax benefits.

Balance Sheet

The balance sheet presents a summary statement of the firm's financial position at a given point in time. This statement balances the firm's assets (what it owns) against its financing, which can be either debt (borrowing) or equity (ownership).

Income Statement (Profit & Loss Statement)

The income statement provides a financial summary of the company's operating results during the period specified.

Payment in Advance

This means that the periodic lease rental is paid at the start of each payment period.

Payment in Arrears

This means that the periodic lease rental is paid at the end of each payment period.

Advance Payment

This refers to lease rental that is paid at an earlier date though the total lease rental remains unchanged.

Security Deposit

This refers to a deposit placed with the lessor that usually earns no interest income for the lessee. The security deposit is eventually returned to the lessee upon returning the equipment in good condition.