Definition: A lease contract is a written agreement between two parties that identifies the terms of the lease as well as the leased property. The leased property’s owner is called the lessor and the company renting the property is considered the lessee. A business lease for a building or equipment is not much different than a personal lease for an apartment.
What Does Lease Mean?
Many companies can’t afford to buy buildings or large pieces of equipment, so they rent them. When a company signs a rental contract for a period of time, the contract is considered a lease.
The most common items found in a lease contract are:
- The names of the lessor and lessee
- The name and description of the leased property
- Specific lease payment amounts and times
- Penalties for late payments
- Contract duration
- Ending buyout agreement
There are many different kinds of leases. GAAP groups all leases into one of two main categories: operating or capital leases. Operating leases are accounted for simply expensing the lease payments just like a company would do with rent expense.
Each month the lessee will record a rent payment as an expense. Capital leases, on the other hand, are capitalized. This means that the lessee must record the leased property as an asset other its balance sheet as if the company owned the leased property. The lessee must also record the lease liability, or lease payments due at some point in the future, as a liability on the balance sheet.