Operating lease

An operating lease is a lease which allows borrowing party to keep its leased asset out of its accounting balance sheet, and pay rent on it. The leased asset is not capitalised.

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An operating lease lets the borrowing entity keep its debt equity ratio low, and hence, favourable in the eyes of investors. Assets, if capitalised even when leased, increases a company’s debt.

Financial lease capitalises the leased asset and recognises it as a liability.