The finance lessor does not show the leased asset in its balance
sheet even though, as a matter of law, it owns it. Instead, the
finance lessor's outlay in purchasing the leased asset is shown in
its balance sheet simply as a loan to the lessee.
The rentals receivable by a finance lessor are split into two
elements. One element is a `capital' element going to repay the
loan shown as an asset on the lessor’s balance sheet. The
other element is a finance charge (that is, in substance, the
interest on the loan) which is credited to the lessor’s
profit and loss account as income. This is usually achieved by
crediting the gross rentals receivable to the lessor's profit and
loss account and then by charging the `capital' element, which
reduces the loan outstanding, against profits. This charge to the
profit and loss account is described, perhaps somewhat
misleadingly, as `depreciation'.
The finance lessor's commercial profit shown by its accounts
(as in the case of any lender) is merely the `interest' on the
`loan'.
