Glossary of professional terms

Leasing

The word originates from the English expression “to lease” which also means “to rent”. It represents a form of financing that enables the lessee to rent a vehicle, equipment or real estate (in general: subject of leasing) with the purpose of using it for business purposes.

Thus, leasing has both the characteristics of a loan and the characteristics of a traditional rental. The similarity with a loan lies especially in the instalment payment of contractual obligations, while the similarity with rental lies in the legal-formal ownership of the subject of leasing.

Throughout the entire period of the contractual relationship, the lessor is the owner of the subject of leasing. Leasing is similar to bank loans, since the lessee is paying his/her contractual obligation in instalments.

We distinguish between two types of leasing that essentially differ between each other in the transfer of ownership upon the expiry of the contract, the duration of the contract and other characteristics: financial and operating leasing.

Lessee

The lessee is a legal or physical entity that concludes a contract on leasing of equipment, without regard to the fact of whether it involves financial or operating leasing. It is the person who uses the equipment and can also be referred to as “the customer” or, under certain conditions, as “the buyer”.

Lessor

The lessor is a legal entity that provides financing to lessees.

Financial leasing

Upon the expiry of a financial leasing contract, the lessee becomes the owner of the subject of leasing (e.g. vehicle or yacht/sailboat). Until the payment of all annuities and the purchase option, the lessor is the legal owner of the subject of contract.

The contract usually lasts for the entire period of the asset’s usefulness. The risk of loss in the sale of equipment is taken over by the lessee. Until the payment of all annuities and the purchase option, the lessor is the legal owner of the subject of contract.

The value-added tax is to be paid at the beginning of lease relationship. It is calculated from the total value of the subject of leasing. The lessee (company) may use the investment tax deduction, except for passenger cars.

The costs of usage (servicing, registration, insurance) are incurred by the lessee.

Operating leasing

This form of financing is especially suitable for those who are only interested in the use of equipment and not in the ownership as well, since the latter is not transferred to the lessee upon the expiry of the contract.

The contract is usually concluded for a period shorter than in the case of financial leasing. Upon the expiry of the contract, the lessee does not have to deal with the sale of equipment.

The value-added tax is charged for each instalment separately. It is not possible to use tax deductions (unless in the case of cargo vehicles), however, the rent represents an expenditure.

The lessee may use all the advantages of the off-balance-sheet financing. The entire rent represents balance-sheet expenditure and consequentially decreases the tax basis in the income tax account.

Opportunity costs

Opportunity costs can also be called alternative costs. This is the amount of earning from some other investment, which has to be called off by the entrepreneur if he/she wants to invest in the purchase of a vehicle.

Depreciation

Depreciation is the amount that abandons the depreciable asset in an individual accounting period and represents the then expense, except in case of the reduction of revaluation capital adjustment.

Depreciation process

The depreciation process is the reallocation of the value of the depreciable asset to the amounts that are gradually abandoning it in the estimated period of its useful life. As a rule, the depreciation process signifies expenses.

Depreciable assets

Depreciable assets are assets that:

• are used for a period longer than a business year,
• have a limited period of useful life,
• are intended for use in the production or supply of products and services, are lent to others for payment or are owned for other reasons.

Depreciable amount

The depreciable amount is the purchase value, corrected in the revaluation of the asset and reduced for an estimated remaining value.

Depreciation basis

In the case of equitable time depreciation, the depreciation basis is identical to the depreciable amount, while in the case of time depreciation, it is identical to each non-written-off value.

Depreciation rate

In the case of equitable time depreciation, the depreciation rate is the ratio between the value being transferred on business effects in individual years and the depreciation basis. However, in the case of decreasing time depreciation, it can also be the ratio between the remaining period of useful life and the entire period of useful life.

Time depreciation

Time depreciation is the accounting of depreciation according to the period of useful life.

Usage (functional) depreciation

Usage (functional) depreciation is the accounting of depreciation according to actual usage in an individual period.

Cash flow

Cash flow consists of receivables and expenditures. Receivables represent the inflow of cash into the company, while the expenditures represent the outflow of cash from the company. The difference between receivables and expenditures represents the net cash flow. The cash flow has a great influence on the liquidity (financial solvency) of a company.