Are capital leases depreciated or amortized?

Okay, so about capital leases… are they depreciated or amortized? It’s depreciation, actually. Which, you know, kinda makes sense when you think about it. It’s like, if you were buying something – like, imagine getting a car, but instead of buying it outright, you lease it for, say, five years, and at the end of those five years, it’s basically yours (or the cost to buy it out is super low). You’re gonna depreciate that car, right? Because it’s losing value over time, just like something you own.

With a capital lease, it’s similar. You’re treating it almost as if you own the asset. So, you put it on your balance sheet (unlike an operating lease where you don’t), and you depreciate it over its useful life. Or, if the lease term is shorter than the useful life, you use the lease term. It’s like… hmm, what’s a good example? Imagine leasing a fancy espresso machine for your cafe for 3 years. The machine could last for 5, but your lease is only 3. So you depreciate it over those 3 years. Makes sense, doesn’t it? It’s like squeezing all the value out of that machine (depreciation-wise) during the time you actually have it.

So yeah, depreciation, not amortization. It’s all about recognizing that even though you’re leasing the asset, for accounting purposes, it’s pretty darn close to owning it.

#Amortization #Capitalleases #Depreciation