{m}.{s}.1Purchase of assets

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:

  • Leasing the asset instead of purchasing it.
  • Increasing/obtaining a bank overdraft to buy the asset.
  • Obtaining a bank or other loan to buy the asset.
  • Taking out a hire purchase contract.

We will look at the accounting treatment of these options - in particular, the treatment of hire purchase.

 

{m}.{s}.2Leasing

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:

OPERATING LEASES
Where the lessee is really renting the asset.
FINANCE LEASES
Where the total amount paid to the lessor over the period of the lease is equivalent to paying the full cost of the asset together with a finance charge.