Identify the two recognized lease accounting methods for lessees and distinguish between them.

A person who takes land, equipment, building, or any property on lease is called a lessee. A lessee is not the owner of the property but instead, has the right to use it. Lease payments are usually made monthly.

The operating method and the capital-lease technique are the two lease accounting methods accessible to lessees. The leased asset remains a lessor's property under the operating method, with the payment of a lease rental reported as a rental expenditure. In most cases, a lessor is responsible for the leased asset's insurance, taxes, and upkeep.

A lessee uses the capital-lease technique to handle the leasing transaction as if it were a credit purchase; as a result, the lessee creates an asset and an associated obligation, and accounts for asset depreciation, liability reduction, and interest expenditure.

1. Creates an asset and an associated obligation; and
2. Accounts for asset depreciation, liability reduction, and interest expenditure.