An operating lease is the rental of an asset from a lessor, but not under terms that would classify it as a capital lease. The operating lease concept allows a business to keep from recording an asset on its balance sheet. This type of arrangement is known as off-balance sheet financing.
An operating lease tends to have a shorter duration than a capital lease, and the lessee does not have the option to acquire the asset through a bargain purchase option. During the rental period, the lessee typically has unrestricted use of the asset, but is responsible for the condition of the asset at the end of the lease, when it is returned to the lessor.
An operating lease is especially useful in situations where a business needs to replace its assets on a recurring basis, and so has a need to swap out old assets for new ones at regular intervals. For example, the lessee may have decided to replace the office photocopier once every three years, and so enters into a series of operating leases to continually refresh this equipment. Automobiles are also commonly leased under operating lease arrangements.
The lessor records the asset under an operating lease as a fixed asset on its books, and depreciates the asset over its useful life.