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Many entrepreneurs get into business ownership because they are passionate about providing the product or service that they offer says Edmonton bookkeeping. But the fatal assumption is according to Michael Gerber is if you understand the technical work of the business, you understand a business that does that technical work. Unfortunately, that is not true, and entrepreneurs who are good at providing the product or service that their business sells are not necessarily going to know how to run their business effectively. Therefore, it is very important that entrepreneurs learn early on in their business how to read their financial statements so that they can make more informed business decisions.
One of the most important ways that an entrepreneur can help ensure the accuracy of their financial statements, is to learn how to account for their loans and leases correctly. If they are not entering in loans and leases accurately into their accounting software, they will end up but only with incorrect financial statements, but that will lead to them not understanding what the cash flow is in their business either.
It is important that entrepreneurs understand this before obtaining any financing in their business so that they can avoid getting financing that they can afford to pay for. They need to ensure that they have enough income in their business to cover the principal payments of loans. If they do not have a profit to use for loan payments, they will run a negative balance to make those payments says Edmonton bookkeeping. If they do that often enough, they will end up running out of money in their business. Therefore it is very important that entrepreneurs can read their financial statements in order to understand if they have enough profit in their business to obtain more financing.
The next important thing that entrepreneurs need to understand is that the monthly payments that they are making to their loans and capital leases should be posted to the balance sheet and not the income statement. However, that is for the principal payment. Interest payments actually belong on the income statement. Edmonton bookkeeping says that if it is not obvious or known to the business owner what is that interest component is, then they can put the entire amount on the balance sheets.
The reason why loans and leases get put on the balance sheet is that it is telling the overall financial position of the business. Because the loans and leases that an entrepreneur is getting benefits the entire business as a whole, those payments should appear on the balance sheet. The income statements is for detailing the financial performance of the business in a specific time period. However, it is important to note that the reason why the interest component goes on to the income statement, is because the interest is accrued monthly, and should go into the specific time period that the interest is accrued in.
When entrepreneurs are able to understand how loans and leases get accounted for on the balance sheet and income statements, they can end up with the more accurate reports in order to base their financial decisions on. Doing this, they can learn how to make better choices that can help them grow their business.
When entrepreneurs learn how to appropriately do the accounting for their loans and capital leases on their financial statements, Edmonton bookkeeping says that they will be better prepared to make financial decisions in their business. Not only do many entrepreneurs struggle with understanding basic business finances, but that lack of information often causes entrepreneurs to make decisions in their business that is financially problematic. By learning how to account for loans and leases early on their business, can help entrepreneurs make more informed financial decisions earlier in their business, and succeed.
In order to understand how loans and capital leases get accounted for, entrepreneurs should understand the difference between the two. Edmonton bookkeeping says entrepreneurs might think that they are the same because they are paying money, and using an asset and return. But they are very different because one is considered an asset and the other is considered a liability.
Loans are considered an asset to the business because the money that an entrepreneur pays for the loan is being used to acquire that asset that they will and at the completion of the loan terms. This looks very positive for banks when they are granting more financing, because not only is an entrepreneur paying money responsibly, but they are building equity in their business at the same time. Therefore, when entrepreneurs book this appropriately on their financial statements, a can help them obtain financing in their business later on when they need it.
Leases, on the other hand, are considered a liability, because at the end of the lease term, an entrepreneur does not and up with that assets. Edmonton bookkeeping says that entrepreneurs can simply think of rent when their thinking of how a leases a liability. They have to keep on paying in order to use that asset, and not own anything at the end of it. And also, if an entrepreneur does and that lease, it is usually because they have signed a different lease, so they are never breaking free of the cycle of paying money that is not going to build equity in their business.
The exception to these rules is Edmonton bookkeeping is when an entrepreneur has a capital lease. Capital leases are actually legally structured like a loan because the transaction is geared towards ownership despite the name lease. If an entrepreneur has discounted buyout option at the end of the term, or if the term of the lease is for longer than 75% of the assets useful lifespan, those leases are capital leases under actually considered an asset, because an entrepreneur will own that asset at the end of the term.
When entrepreneurs can understand how loans and leases get booked in their accounting software, they can ensure that there ending up with accurate and up-to-date financial statements that they can use to make financial decisions in their business. By learning how to do this early on in their business, entrepreneurs will be able to ensure their financial decisions are good early on and increase their chances of succeeding.
