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Explain Operating Lease.
Operating lease is a lease contract which has a smaller period of time compared to the useful life of the asset being leased. In this contract, two parties are involved i.e. lessor and lessee. It is commonly used to acquire asset on short term basis. In this lease contract, lessor selects and purchases the asset and allows the lessee to use the asset but do not transfer the ownership in the asset. After the lease period is over the lessee returns the assets to the lessor. The lease rent paid by the lessee does not contain any part towards the cost of the asset. He only bears the cost of repairs, maintenance and insurance of the asset. Since the lessee does not assume the risk of ownership, the lease expense is treated as operating expense.
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