Essay on Accounting For Leases And Operating Leases

819 Words Jun 9th, 2015 4 Pages
This case study provides an overview of accounting for leases, specifically capital and operating leases. Some researchers have found that managers manipulate leasing data in order to report a large amount of debt on the off balance sheet, rather than on the financial statement (Biondi et al, 2011). When an entity leases property, they must pay installments on the property for the terms of the lease contract (Schroeder et al, 2011). While there are some benefits in leasing property, there are also some complications that may occur. This paper will explore the accounting for leases and identify differences between the types of leases a firm may pursue.

Leasing: Capital or Operational Several studies have been conducted on the various complications of leases. The main criticism of lease accounting as portrayed by (Hepp & Scoles, 2012; Schroeder et al, 2011), is how easily it can be manipulated. Schroeder et al (2011) introduces two methods of allocating lease revenues and expenses to the periods covered in the lease contract. The first method falls under capital leases, which are considered to be characteristics of ownership and assets for accounting. The second method, operating leases is the opposite of capital lease whereas these lease contracts are regular rental contracts for accounting purposes (Schroeder et al, 2011). Hepp & Scoles (2012) explains that, leases are classified as a partial sale or sales with partial rights of returns. Some entities…

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