This is also called a financial lease. Finance leases are where the lessee receives ownership of an asset when the lease term expires (Brigham & Ehrhardt, 2020). A capital lease is a long-term arrangement that is noncancelable. The lessee is obligated to pay lease rent till the expiry of the lease period. The period of lease agreement generally corresponds to the useful life of the asset concern. A long-term lease in which the lessee must record the leased item as an asset on his/her balance sheet and record the present value of the lease payments as debt. Additionally, the lessor must record the lease as a sale on his/her own balance sheet. A capital lease may last for several years and is not cancelable. It is treated as a sale for tax purposes. Contrary to capital lease, the period of operating lease is shorter, and it is often cancelable at the option of the lessee with prior notice. Hence, an operating lease is also called an Open-end Lease Arrangement. The lease term is shorter than the economic life of the asset. Thus, the lessor does not recover its investment during the first lease period. Some of the examples of operating leases are leasing of copying machines, certain computer hardware, world processors, automobiles, etc. I will be reviewing the capital lease and operating lease. A capital lease is also referred to as a financial lease is a long-term arrangement that is non-cancelable. The lessee is obligated to pay lease rent until the expiry of the lease period. Contrary to the capital lease is the operating lease which is for a shorter period and is cancelable. It is also called an open-end lease arrangement. In the case of a capital lease, the risk of equipment obsolescence is shifted to the lessee rather than on the lessor. On the other hand, for an operating lease, the risk of loss shifts from the lessee to the lessor.

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