When a business finds itself needing a new asset, it often does not have the cash available to buy it.
Various choices are then available. These include:
We will look at the accounting treatment of these options - in particular, the treatment of hire purchase.
If the business decides to lease the asset instead of buying it, it enters into a contract with a leasing company. It is the leasing company that purchases the asset and retains ownership of it. The business using the asset pays an agreed amount, usually monthly or quarterly, to the leasing company for use of the asset. VAT is charged by the leasing company.
Leases fall broadly into two categories: