What is the difference between a financial lease and an operating lease

What is the difference between a financial lease and an operating lease Introduction: The World of Leasing Hello, everyone! Leasing is a prevalent practice in the business world, enabling companies to acquire assets without the need for substantial upfront investments. However, within the leasing landscape, two primary types stand out: financial leases and operating leases. Today, we'll explore the nuances between these two arrangements, as they can have significant implications for businesses and lessees. Financial Lease: A Closer Look Let's start with the financial lease. This type of lease is often considered more akin to a loan. When a business enters into a financial lease, it essentially commits to a long-term arrangement, typically covering the majority of an asset's useful life. The lessee is responsible for the maintenance, insurance, and other costs associated with the asset. Importantly, the lessee also assumes the risk of obsolescence. From an accounting perspective, a financial lease is treated as a liability on the lessee's balance sheet, with corresponding asset recognition. Operating Lease: A Different Approach In contrast, an operating lease is more flexible. It's often of shorter duration and doesn't span the entire useful life of the asset.