Accounting for operating leases is an essential part of any business’s financial strategy. These leases provide companies with the flexibility to access equipment or services without the costs associated with outright purchase. Under an operating lease contract, a company agrees to pay the lessor rent over a specified period of time in exchange for use of the asset. Operating lease payments are recorded as an expense on the company’s income statement and can be used to offset tax liabilities. The key to effective accounting for operating leases is understanding the differences between capital leases and operating leases and adhering to the required practices and procedures established by the Financial Accounting Standards Board (FASB).