Introduction: Lease accounting: Finance lessor’s balance sheet
A finance lessor’s accounts show no physical asset in its balance sheet even though it owns the leased asset. Instead the lessor shows its financial investment in the lease (in substance, the ‘loan’ outstanding) as its asset. The ‘loan’ is equal to the remaining capital instalments due under the lease. At the outset the ‘loan’ will generally be equal to the cost of the asset bought by the lessor.
For accountancy purposes only the interest element in the rents is shown as income (gross earnings) of the finance lessor. The so-called ‘capital’ element reduces the lessor’s net investment in the lease (the ‘loan’).