What is the difference between a capital lease and just buying the asset?
Actually, it’s sort of a combined legal and accounting question.
Legally, it comes down to who actually owns the asset. If you own the asset, but the finance company has a security interest in it (i.e. a right to take the asset if you default in paying for it) it is considered a purchase. On the other hand, if the finance company owns the asset, but you have a lease on it (i.e. you have the right to use the asset until you default in paying for it), it’s leasing. Oftentimes, a lease can be set up so that you own the asset at the end (or perhaps pay a nominal amount), so in a practical sense it’s almost exactly like buying.
Once you’re leasing an asset, you have to ask the accounting question of whether it is an operating lease or a capital lease. In other words, is the lease more like just renting the asset for a time, or more like buying the asset outright with the leasing company giving you financing on it.
If the lease is an operating lease, the accounting is easy – what you pay to lease the asset every month (or whatever) is an expense.
If a lease is considered to be a capital lease, the accounting rules require you to account for it as though you purchased the asset outright and had the the leasing company give you financing on it. In other words, it’s a method to have the accounting for a transaction that is economically similar to a purchase track the accounting you would have to do for a purchase.
Now, there are a lot of tricks you can do for things that are on the edge of the slightly different rules about capital leasing under tax law, accounting rules, bankruptcy law and other sets of rules, but that’s a whole 'nother discussion.
Hope this helps.