what is lease financing ignou assignment

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• Business organization and management

Q14 What is lease financing

Subject : Accounting

Q.14 What is lease financing?

Answer Created with AI

Lease financing is a type of arrangement where a company or individual rents an asset from a lessor (the owner of the asset) for a specified period of time in exchange for regular payments. The asset can be anything from equipment and machinery to vehicles or property.

Lease financing offers several advantages. Firstly, it allows businesses to acquire and use assets without the need for a large upfront investment. This can be particularly beneficial for small businesses or startups with limited capital. Additionally, lease payments are typically tax-deductible, which can provide further financial benefits.

There are different types of lease financing arrangements, including operating leases and finance leases. In an operating lease, the lessor retains ownership of the asset, and the lessee has the right to use it for a specific period. This type of lease is commonly used for assets with a shorter useful life. On the other hand, a finance lease is a long-term lease where the lessee effectively assumes ownership of the asset and is responsible for its maintenance and insurance.

Lease financing can be a flexible and cost-effective way for businesses to access the assets they need without committing to a large upfront purchase. However, it's important to carefully consider the terms and conditions of the lease agreement, including the duration, payment structure, and any potential penalties or restrictions.

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What do you mean by Lease Financing ? Discuss its merits and demerits?

Meaning of lease financing— lease financing is a contractual agreement between the owner of the asset who grants the other party the right to use the asset in return for a periodic payment and the other party who is the user of such assets. the owner of the party is known as lessor and the user of the asset under such agreement is known as lessee and the rental paid is known as lease rental. merits of lease financing 1. cheap source— it enables the lessee to acquire the asset with a lower investment only. 2. no dilution of ownership— it provides the finance without diluting the ownership or control of the business. 3. easy replacement of asset— the risk of obsolescence is borne by the lesser. this allows greater flexibility and cheap financing to the lessee to replace the asset. 4. tax benifits— lease rentals paid by the lessee are deductible for computing tax liabilities. it further reduces the cost of taking asset on lease. limitations of lease financing 1. contractual constraints— a lease agreement may restrict the lessee to make any alteration or modification in the asset. 2. renewal of lease agreement— the normal business operations and growth of the business is badly affected in case the lease is not renewed. 3. no capital gains— the lessee never becomes the owner of the asset inspite of paying heavy lease rentals. it deprives him of the residual value of the asset..

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