The initial step in logging a lease is to identify it as either an operating or finance lease. With an operating lease, the associated rent expense is captured in the income statement, leaving the lease obligation off the balance sheet. Conversely, a finance lease results in recognizing both a right-of-use asset and a correlated lease liability on the balance sheet. Payments towards a lease are allocated between interest charges and repayment of the principal, akin to loan repayments.