How are capital leases reported on a balance sheet?

Capital leases are reported on a balance sheet as both assets and long-term liabilities. This reflects the economic reality that, despite legal ownership of the leased asset remaining with the lessor, the lessee effectively has control over the asset and is accountable for its depreciation.

In accounting, a capital lease denotes a lease that is treated similarly to an asset purchase. The lessee assumes ownership risks and benefits associated with the asset, leading to the requirement to recognize the asset on the balance sheet. This asset is recorded at its present value of future lease payments.

Correspondingly, a liability is also recognized on the balance sheet due to the obligation to make future lease payments. This liability is classified as a long-term liability if the lease term extends beyond one year, aligning with standard practices of categorizing obligations based on their maturity.

Other options, such as reporting only as short-term liabilities, expenses, or investments, do not align with the principle of matching the recognition of asset ownership and associated liabilities that arise from capital leases. This comprehensive approach to reporting captures the economic obligations and asset control under the capital lease terms.