What Effect Does Leasing Have on a Firm's Balance Sheet?

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Leasing effects a firm's balance sheet by either being recorded as an asset if the lease will result in ownership, or it should be recorded as an expense. Understand how to record leased items in a balance sheet with information from an accounting professor in this free video on business.

Part of the Video Series: Balance Sheets
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Video Transcript

Hi, my name is Shawn Jones, adjunct professor at Argosy University. Today, we're going to discuss the effects of leasing and what that does to a company's balance sheet. Leasing is simply...is as simple as it sounds. Leasing some type of land or a building or a car or a truck -- something like that. What does that do to a company's balance sheet? If the lease is some type of a capital lease, meaning the company will eventually gain ownership of that asset, then that lease will need to be recorded as an asset on the company's balance sheet. However, if the lease is simply a payment that can be expensed or that lease payment is something that, after the term of the lease is completed, the company will not take ownership of that asset, then that can be recorded simply as an expense on the company's income statement. This can...will allow the company to have future capital and not have to invest as much money in property, plant, or equipment, and use those funds available to invest in other areas of the business. It will also allow the company to update its assets or equipment in a more current manner, and perhaps reduce the amount of money that is spent on repairing or refurbishing or maintaining those assets which the company holds. For more information about this topic, please visit our website at argosy.edu. There you can find our phone number or an address to come and visit our Salt Lake City campus.


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