Q. Economic substance of the transaction?
In a few business transactions the economic substance of the transaction conflicts with its legal form. For instance a contract that is lawfully a lease may in fact be equivalent to a purchase. A company may perhaps have a three-year contract to lease (rent) an automobile at a stated monthly rental fee. At the end of the lease period the company obtain title to the auto after paying a nominal sum. The economic substance of this transaction is a purchase somewhat than a lease of the auto. Therefore under the substance-over-form concept the auto is an asset on the balance sheet and is depreciated instead of showing rent expense on the income statement. Accountants record a transaction's economic substance somewhat than its legal form.