What is the difference between pure and financial leasing?

Leasing is a concept that is considered very important in business. New companies, or SMEs, often work with what is leasing since their resources become fair and the owners of companies do not have the possibility to invest a lot of money in the acquisition of assets to support the business from the beginning. That is why they lease the assets whenever they require it.

Leases generally last 12 months, and the term should not be confused with rent. The landlord and tenant sign cleasing contracts when they rent assets that can be properties such as real estate or a vehicle.

The purpose of a lease is intended to protect both the landlord and the consumer by informing each party of their responsibilities and obligations. The lease will include the duration of the agreement, the monthly or annual rental payment, the procedures for collecting rent, as well as the obligations that the tenant has when leasing a active

If the landlord or lessee fails to comply with any of the terms of the lease, the lease is no longer binding. The offending party may be subject to legal action and financial penalty for breach of contract.

This lease can be of two types:

• Financial leasing
• Pure lease

The pure and financial leasing are the different accounting methods that exist. Both types of leases are used for different purposes and result in different accounting treatment.

In the case of finance leasing, all risks and rewards related to the asset under consideration, are transferred to the lessee over a medium or long period of time term.

Whereas, in the case of pure leasing, it is when all the risks and rewards related to the ownership of the asset remain with the lessor. In this type of lease, the lessee returns the asset after using it for the agreed lease term. Payment is made for a short period of time.

Let's see specifically what are the main differences between pure and financial leasing.

Pure and financial leasing: key differences

1. A finance lease is one that must be recorded in an accounting system. On the other hand, the pure is one that does not need to be registered in any accounting system. It is for this reason that an operating lease is also called an "off-balance sheet lease."
2. Under a finance lease, ownership is transferred to the lessee. Under a pure lease, ownership is not transferred to the lessee.
3. The contract under a pure lease is called a rental agreement or contract. That of the financier is called a loan agreement or contract.
4. The contract cannot be canceled, once both parties sign the agreement. On the contrary, the cigar can be canceled, however, only within the primary period of this.
5. While the cigar offers a tax deduction for rent payments, the financier offers a tax deduction for depreciation and finance charges.
6. For the financial lease, the possibility of an option to purchase the asset is offered at the end of the contractual period, with the pure, said offer is not offered.

Which is better, pure or financial leasing?

At this point, the answer to this question will often depend on the particular situation of your company.

The pure lease reduces the administration for the last user and allows them to simply return the asset at the end and pay a simple monthly refund. These are generally efficient for organizations that are running few assets due to management savings.

On the other hand, a finance lease will have more administration requirements And depending on the type of asset and the organization's guidelines, it will have additional resale risk to the lessee.

However, companies prefer finance leasing, operating leases provide greater flexibility to companies, as they can replace / upgrade their assets with greater frequency.

There is no risk of obsolescence, as it is not a transfer of ownership. Accounting for a finance lease is simpler.

Conclution

Understanding what pure and financial leasing is is important. Identifying them will help you discover which one is the most suitable for your business in a particular situation.

Since companies commonly use both leases, it is helpful to understand the accounting treatment and corresponding tax for each of these types of leases for both the lessor and the lessee.

Each type of lease has its own advantages. Depending on the requirements of the company and the tax situation, it is possible to opt for one or the other, or possibly even a combination of both for different types of assets.

If you want to use assets, but don't want to display them under the accounting record, pure leasing is the best option for you.

If you want to use an asset that you can't afford to buy right now, you should go for a finance lease where you can use it for a longer period of time and at the same time you could also get an option to buy it at the end of the period contractual.