When you require a new asset for your business, it is a good idea to consider whether you should lease or buy prior to the purchase. The asset could be motor vehicles, machinery, IT equipment or other items required for your business. There are cash flow, accounting and tax differences to the options.
A finance lease means that the lessee has the risks and rewards of ownership, with an operating lease the lessor retains the risks and rewards. For example, if the asset depreciates in value the lessee with a finance lease suffers, however, the operating lessee does not.
If your business isn’t cash rich, either a finance lease or an operating lease may be an attractive option. I recommend comparing all available options when making the decision. Utilising a return on investment calculation, net present value and/or comparing costs of finance are all useful to the decision making process.
If you own the asset, whether via a cash purchase or a finance lease, the asset should be reflected on your balance sheet. An asset for accounting purposes is typically over £250 and has a useful life of over 2 years. If purchasing via a finance lease, the outstanding lease value should also be shown on your balance sheet. If you are utilising the assets via an operating lease, this will be treated the same as a normal rental, and not shown as an asset on the balance sheet, but expensed via the profit and loss account.