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What is Lease and its type?

Lease: It is a contract between lessor (owner of asset) and lessee (user of asset) in which lessee pays fixed amount for using the lessor's asset for fixed period or for specific purpose.

Royalty vs lease payment:
Amount paid by lessee to lessor on the output raised from leased asset is known as royalty and amount paid on using the leased asset to lessor is known as lease payment.

Advantages of lease:
·        A company is not required to purchase an asset which are used for fixed period only.
·        No need to arrange a big amount to pay only rental value of leased asset.
·        Financing assets through lease may give some tax benefits.
·        Financing through lease is much more easier then taking loan from financial institution.
Disadvantages of Lease:
·        Lessee has to return the leased asset after completion of lease period.
·        There is a burden on company to pay lease even if company suffers loss.

Types of lease:

Sale and lease back: In this lease company sells its own asset to lessor and then use that asset on a lease from the lessor who pays full amount of that asset and become owner of it.

Leveraged lease: In this lease 3 parties are involved that is lessor, lessee and lender. The lessor is not able to finance the whole asset so he involves third party that is lender who finances the remaining amount of asset which is more than the lessor finance and the lender become owner of that asset. The lessee make payments to lessor who passes the payment to lender.

Operating lease: The lessor bears all expenses related to lease asset. After giving notice anyone or both can terminate the lease.

International & Domestic lease: If lessor and lessee are live in same country then it is known as domestic lease. If lessor and lessee are live in different countries then it is known as international lease.

Import lease: If the lessor and lessee are belong to same country and the supplier of leased asset is belong to foreign country. It is known as import lease.

Financial lease: It is also known as capital lease. It is long term lease in which lessee pays more than the leased asset value and he doesn't receive any service by lessor and it is non cancel able lease.

Full and Non pay out lease: If the lessor receive full amount of leased asset then it is known as full pay out lease. And if the lessor doesn't receive full value of leased asset and for receiving full value leasing that asset again and again by lessor is known as non pay out lease.

Sales aid lease: In this lease the lessor helps the manufacturer by marketing his product through lease and for that manufacturer pays commission to lessor.

Capital Lease: This type of lease is mention as liability in lessee’s balance sheet. It is recorded in the books of accounts on the accrual basis.

Closed-End Lease: In this lease the lessee has no obligation to purchase an asset at the end of lease period if the leased asset value is less than the salvage value. The lessee has no obligation to pay the loss suffer by lessor.

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