operating lease

(noun)

A lease whose term is short compared to the useful life of the asset or piece of equipment being leased.

Related Terms

Examples of operating lease in the following topics:

  • Overview of Lease Accounting

    • There are two types of leases: capital leases and operating leases and each has a different accounting methodology.
    • There are two types of leases capital leases and operating leases.
    • On the other hand, an operating lease lets a company obtain equipment with virtually no upfront capital outlay and with the lease payments treated as a deductible cost of business.
    • Under an operating lease, the lessee records rent expense (debit) over the lease term, and a credit to either cash or rent payable.
    • Under an operating lease, the lessor records rent revenue (credit) and a corresponding debit to either cash/rent receivable.

  • Being Aware of Off-Balance-Sheet Financing

    • Another example of off-balance-sheet financing is an operating lease, which are typically entered into in order to use equipment on a short-term basis relative to the overall useful life of the asset.
    • An operating lease does not transfer any of the rewards or risks of ownership, and as a result are not reported on the balance sheet of the lessee.
    • For example, if a company defaults on the rental payments required by an operating lease, the lessor could repossess the assets or take legal action, either of which could be detrimental to the success of the company.

  • Operating Expenses, Non-Operating Expenses, and Net Income

    • Operating expenses and non operating expenses are deducted from revenue to yield net income.
    • An operating expense is the ongoing cost of running a product, business, or system.
    • Paper, toner, power, and maintenance costs represent operating expenses.
    • In business, operating expenses are day-to-day expenses such as sales and administration.
    • Non operating expenses include loan payments, depreciation, and income taxes.

  • Classifying Liabilities

    • For firms with operating cycles that last longer than one year, current liabilities are defined as those liabilities which must be paid during that longer operating cycle.
    • Example of current liabilities include accounts payable, short-term notes payable, commercial paper, trade notes payable, and other liabilities incurred in the normal operations of the business.
    • Some of these normal operating costs include salaries payable, wages payable, interest payable, income tax payable, and the current balance of a long-term debt that will be due within a single year.
    • When a debt becomes callable in the upcoming year (or operating cycle, if longer), the debt is required to be classified as current, even if it is not expected to be called.
    • These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

  • Activities of the Business: Financing, Investing, and Operating

    • Activities of the business include operating activities and non-operating activities such as investing activities, and financing activities.
    • Under GAAP, operating cash flows include:
    • In addition to operating activities businesses engage in non-operating activities.
    • Non-operating activities are not related to the day-to-day, ongoing operations of a business.
    • As with operating activities GAAP principles dictate how non-operating items are classified on the statement of cash flows.

  • Analyzing Long-Term Liabilities

    • $\frac { Long-Term\quad Debt\quad +\quad Value\quad of\quad Leases }{ Average\quad Shareholders\quad Equity }$

  • Introduction to the Income Statement

    • The income statement reflects a company's operating performance.
    • The income statement is also referred to as a "profit and loss statement" (P&L), revenue statement, statement of financial performance, earnings statement, operating statement and statement of operations.
    • It then calculates operating expenses and, when deducted from the gross profit, yields income from operations.
    • Adding to income from operations is the difference of other revenues and other expenses.
    • When combined with income from operations, this yields income before taxes.

  • Amortization of Intangible Assets

    • Company X purchases a patent for $17,000, which enables the owner to manufacture, sell, lease, or otherwise benefit from an invention for 17 years.

  • Preparation of the Income Statement

    • Other expenses or losses not related to primary business operations (e.g., foreign exchange loss).
    • Discontinued operations is the most common type of irregular items.
    • Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations.
    • Discontinued operations must be shown separately.Disclosures
    • Explain the difference between the operating and non-operating section of the income statement

  • Working Capital Management Analysis

    • Working capital is a financial metric that represents the operational liquidity of a business, organization, or other entity.
    • Working capital (abbreviated WC) is a financial metric that represents the operational liquidity of a business, organization, or other entity.
    • Along with fixed assets, such as property, plant, and equipment, working capital is considered a part of operating capital.
    • Positive working capital is required to ensure that a firm is able to continue its operations and has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
    • The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.