Leasing Vs Buying - Small Business Accounting

When running a small business, there is a common question that often arises when it comes to using electronics, equipment or any other major piece of hardware that is necessary to keep a business running. The question is: Which is more beneficial to the company from a financial standpoint, leasing or buying? Both have short and long term advantages, but before choosing the correct one, it is important to know the benefits of each.
Purchasing equipment for a business can be one of the most high dollar expenses that a company has to commit to in order to be able to operate. This cost can be for electronics, large machinery or even basic needs such as furniture. Although some of these costs can be tax deductible, their large amount and many times high percentage of down payment required can really put a tight squeeze on a company's cash flow status. Even though this method of purchasing equipment to do business can be very expensive, there are positives to it. The company will have the equipment for a long time after the purchase, and will now have a high dollar asset under its possession. Also, if it comes time to change equipment, the originally purchased item can be sold, thus bringing income back into the company. The negative side of this is that the owner is always going to be responsible for repairs as well as making sure the equipment is still up to date with current technology.
Just like buying, leasing has both many advantages and disadvantages. The one major piece of accounting that needs to be paid attention to has to do with residual value. Often times, the lessor, or the person or company who is leasing to product out, will require that the equipment have a guaranteed residual value at the end of the lease. This means that the lessee, or the individual or company who is paying for the product, must protect it enough so that it is still worth a specific amount at the end of the lease. An easy example of this is only putting on a specific amount of miles during a car lease so as to protect its resale value. If there is a guaranteed residual value that is set by the lessor, then the lessee must include that value in the calculation of the lease payments. This means that the present value of the minimum lease payments is the present value of the annuity due for the specific number of years of the lease, plus the present value of the residual value at the end of the term. The easiest way to calculate these payments is using an amortization table, which can provide not only a picture of yearly payments, but also a great visual chart of how the financing will be structured.