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In Accounting, we measure and report the economic impact of a transaction rather than the legal form. This is done for the purpose of reliable financial reporting, and is most relevant in revenue recognition, sale and purchase agreements. Let me give you an example. A business might acquire an asset through a lease agreement, but due to the terms of the agreement the asset is recognized as an asset of the corporation (capital lease) and shown as an asset and depreciated rather than being recorded as a monthly expense. While legally the company does not own the asset, because of the terms of the lease we treat the asset as if it has been purchased. |
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