What is Operating Leasing?
If a business needs an item of equipment for a relatively short period of time, say two to three years, then Operating Leasing may be the appropriate solution.
The leasing company will lease the equipment to the business. The leasing company would be planning to sell the asset as a second hand item at the end of the lease period or to lease it on to a different business. Therefore is does not need to recover the full cost of the equipment through the money received from the regular lease payments during the initial term.
Equipment financed under Operating Leases are not shown as assets on the balance sheet. In this case the operating lease cost is treated as a cost in the profit and loss account.
This type of leasing is typically used for equipment where there is a well-established second hand market. This would include assets such as cars, construction equipment, tractors, etc. The lease period will usually be for 24 months through to 36 months, although it can be much longer, but is always less than the working life of the asset.