What is the difference between a capital lease and an operating lease in accounting?

What is the difference between a capital lease and an operating lease in accounting Introduction: The Importance of Lease Classification Hello everyone, and welcome to today's video. When it comes to accounting, leases are a significant aspect. They involve the use of assets and can impact a company's financial statements. But not all leases are treated the same way. In fact, there are two primary types of leases: capital leases and operating leases. Understanding the differences between these two is crucial for accurate financial reporting. So, let's dive in! Defining Capital Leases: The Basics A capital lease, also known as a finance lease, is a lease that transfers the risks and rewards of asset ownership to the lessee. In simpler terms, it's a lease that's more like a purchase. When a company enters into a capital lease, it essentially assumes the responsibilities and benefits associated with owning the asset. This means that the leased asset is recorded as an asset on the lessee's balance sheet, and the corresponding lease obligation is recorded as a liability. Additionally, the lessee also recognizes depreciation expense and interest expense related to the lease.