The 3 keys to equipment leasing are knowing the differences between capital leases and  operating leases and the importance of proper accounting. To ensure you’re accounting accurately for equipment leasing, you need to first understand the types of leases available in the marketplace.

As I’ve recommended to you on many occasions, you should lease long-term assets rather than buy them.  You know it’s easier on your cash flow. So use your cash instead to hire an employee to operate your new gadgetry.

And I say to lease instead of purchase because leases offer you more flexibility in adjusting to frequent changes in technology and your operating needs. And you account for lease payments like you would interest payments on a loan.

Now equipment could include hard assets like computers or forklifts. It could also include the software which is installed and running on the computer. At the bottom of this article, I give you a list of the types of equipment leases people search for everyday on Google.

Capital Lease

A capital lease is one in witch you will own the device at the end of the lease. You’ll have a “dollar buyout” at the end of your lease.

Operating Lease

In an operating lease, the owner transfers only the right to use the property to you. It is a short-term, cancelable lease. And it’s A type of lease which the contract period is shorter than the life of the equipment, and the leasing company pays all maintenance and servicing costs for you.

So an operating lease is the same as you renting the machinery. At the end of your lease, you’ll return the equipment or swop it out for a new one.

Importance of Accounting for Equipment Leasing

I first covered the types of leases so you’d know the difference. And now I’ll cover how to account for these different types of leases in your accounting records.

Capital leases go on your balance sheet as and asset. So you’ll reduce the long-term liability for your equipment or software by the payment each month. That means that each month, your long-term liabilities will decrease by the monthly payment but your short-term liabilities will increase by the same amount — ready for your accounts payable.

Then you will expense the equipment leasing interest on your income statement. And you will reduce your cash by the principal portion of your payment. This transaction will be performed each month until your capital lease has ended.

The reason I make the distinction between the interest and principal portions of your equipment leasing payment is many times your leasing company won’t break out the interest and principal. The invoice you receive from them just states your total monthly payment.

You need to be able to calculate and breakout the interest and principal portions of the equipment leasing payments. So you can do proper accounting each month. And so you know when your lease has ended.

Yes, I’ve heard some companies like Dell Computers  will just continue to send you a leasing bill each month unless you notify them that your equipment lease has ended. That’s right, big companies get away with “murder” at your expense.

Now at the end of your lease, contact the leasing company and let them know you plan to purchase your gadgetry (usually for $1) and to send you proof that you own the machinery.

Operating leases are expensed on your income statement and they are not included as an asset on your balance sheet because you don’t have the risk of ownership.

But in the case of a capital lease, you are responsible for some of the risks of ownership. For this reason, the lease is recognized both as an asset and as a long-term liability (for the lease payments) on your balance sheet. And you get to claim depreciation each year on the lease asset and you can deduct the interest expense portion of the payment each month.

For more information and assistance with equipment leasing, you can call or email me.

And for financing approaches for equipment leasing, you should take a look at my Financing Strategies Report which describes various loan programs and how you may use the funds.

Short List of Leasing Programs Thousands of People Search for Everyday (Hey Google I’m not “keyword stuffing”, I thought it would help clarify my visitor’s leasing options)

• Commercial equipment leasing
• Copier lease
• Dental equipment leasing
• IT equipment leasing
• Forklift lease
• Lease medical equipment
• Lease office equipment
• Leasing kitchen equipment
• Manufacturing equipment leasing
• Photography equipment leasing
• Restaurant equipment leasing
• Small Business equipment leasing
• Software leasing
• Used equipment leasing
• And more

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