Vehicles are the long-term asset of the entity which is used in performing day to day business activities. To make use of vehicles like car, vans or pickup truck, there are two options open to you. One to own the car by buying it or to use it, for specified period by leasing the vehicle. Buying is simply acquiring the car by paying the price, either in the lump sum or via instalments.
On the other hand, leasing is a bit different which allows you to use the asset for a fixed term, by paying lease rentals periodically. So, before coming down to any decision, you have to consider certain parameters concerning your requirements, use, term and so on. And to do so, you need to ascertain the difference between buying and leasing.
Content: Buying Vs Leasing
|Basis for Comparison||Buying||Leasing|
|Meaning||The term buying refers to purchasing the asset by paying the price for it.||Leasing is an arrangement wherein the owner of the asset permits another person to use the asset, for recurring payments.|
|Parties involved||Seller and buyer.||Lessor and lessee.|
|Cost||Cost of owning the asset.||Cost of using the asset.|
|Transfer||Buyer has the right to transfer or sell the asset.||Lessee has no right to transfer or sell the asset to any other party.|
|Consideration||Can be paid in lump sum or in equated monthly installment for a fixed period.||Can be paid through lease rentals.|
|Term||Economic life of the asset.||Specified term|
|Ownership option||Once all the dues are cleared, the asset belongs to the buyer only.||At the end of the term the lessee have two option, either to purchase the asset or return it.|
|Repairs and maintenance||Responsibility of buyer||Depends on the lease type|
|Balance sheet||Shown in the asset side, as non-current asset.||Depends on the lease type.|
|Residual value||Lets the buyer enjoy the residual value of asset.||Lessee is deprived of the residual value of asset.|
Definition of Buying
Buying is an arrangement whereby the seller transfers the ownership of the vehicle to the buyer in exchange for an adequate money consideration. The risk and rewards attached to the ownership are also transferred, with the transfer of title.
The buyer acquires the possession and right to use the asset either by paying the entire amount in one go, i.e. in a lump sum or by paying the cash down to take the delivery of the asset and promising to pay the rest of the amount in regular monthly instalments. The upfront cost consists of the cash price or down payment, taxes, registration fee and other charges.
As the buyer owns the asset, there is no restrictions on the use, transfer or sell the asset. Further, the cost of repairs and maintenance is to be borne by him.
Definition of Leasing
Leasing is defined as an arrangement, in which the lessor confers the lessee the right to use the asset in exchange for adequate consideration, i.e. periodical payments in the form of lease rentals for an agreed term. In this agreement, one party (lessor or leasing company) buys the asset and grants its use by another party (lessee) for a definite term.
Put simply, leasing involves the renting out the long-term asset by the owner, to another party for a regular consideration, payable over the tenancy period. Consideration refers to the lease rental charges, paid by the lessee at regular intervals, for using the asset, which constitutes income to the lessor. AS – 19 deals with leases, which prescribes appropriate accounting policies for both the parties. There are two types of leases:
- Finance Lease: Also known as the capital lease, it is a non-cancellable arrangement whose term is equivalent to the economic life of the asset. Under this type of lease, all the risk and rewards incidental to the ownership is transferred to the lessee however, the title may or may not be transferred. At the end of the specified term, the ownership of the asset can be transferred to the lessee, for a small amount, i.e. at a price which is less than the fair market value of the asset.
- Operating Lease: The kind of lease whose term is shorter than the economic life of the asset and the lessee has the right to terminate the lease by giving a short notice. Under this lease, the risk and rewards associated with the ownership of the asset are not transferred, and after the expiry of the specified term, the asset is returned to its owner.
Key Differences Between Buying and Leasing
The following points are substantial so far as the difference between buying and leasing is concerned:
- The term buying is used to refer a process in which the seller transfers the ownership of the asset to the buyer, for the adequate money consideration. Leasing is an arrangement in which one party purchases the asset and conveys the right to use the asset to another party for periodical payments.
- In buying, the parties involved are the buyer and seller. Conversely, the parties involved in the case of leasing are lessor, i.e. the owner of the asset and lessee, i.e.the user of the leased asset.
- In buying, the value of the asset is the cost of owning the asset, while the value of leasing is the cost of using the leased asset.
- In buying, the buyer has the right to sell or trade the asset anytime. On the contrary, leasing arrangement does not allow such freedom to the lessee, as the ownership of the asset lies with the lessor.
- The consideration for buying the asset has to be paid in lump sum or equated monthly instalment for a specific term. As against this, the lessee has to pay lease rentals every month, so as to use the asset.
- Buying is not restricted to a specified term as in the case of leasing. So, buying allows a person to use the asset throughout its economic life.
- Once the buyer clears all the dues against the asset, he/she owns it. Conversely, at the end of the lease term, the lessee has two options, either to own the asset by giving a nominal amount or return it to the lessor. Although operating lease does not contain this option.
- The repairs and maintenance of the asset are the responsibility of the buyer, in buying arrangement. In contrast, depending on the terms of agreement and type of lease the responsibility for repairs and maintenance is determined.
- A leased asset is an off-balance sheet item. Hence it does not appear in the Balance Sheet. Unlike, buying wherein the asset bought is shown in the asset side of the balance sheet under the non-current asset.
- The buyer of the asset enjoys the salvage value of the asset, because, he/she owns the asset. On the contrary, the lessee is deprived of the salvage value, because the asset is the property by the lessor.
We can say that leasing is an alternative to the buying the long-term asset, out of owned or borrowed funds. One can choose any of the two alternatives, but before that prioritise your requirements, i.e. if you need the asset for a long period, it makes sense to buy the asset because the equivalent annual cost (EAC) of owning and operating cost would be less than leasing it.
Therefore, check out the post-tax EAC of the asset, if it is less than lease rental, then buying should be opted, while if it is greater than lease rental, leasing will make sense.