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One of the first things that entrepreneurs should learn is how to account for loans and capital leases. Edmonton bookkeeping says that this is a great start since many new entrepreneurs have loans and leases in their business because that is how they financed their endeavor. Therefore, learning how to enter that information into their accounting software is a great first step.
When entrepreneurs are entering their loans or leases into their accounting software, the first thing they need to understand is to put it on the balance sheet of the business and not the income statement. The balance sheet tells the overall financial position of the business using all of the assets, liabilities, and equity in the business. Because a loan or lease is either going to be an asset or liability in the business, and it is going to affect the business entirely, it belongs on the balance sheet.
An income statement, on the other hand, says Edmonton bookkeeping is showing an entrepreneur the financial performance of the business in one particular month using the revenue in that month, the cost of goods sold in that month, and the expenses in that month. If an entrepreneur puts the loan or capital lease in the income statement, the first thing it is going to do is negatively impact that month in a huge way, potentially making it look extremely unprofitable been the opposite may be true. And also, the lease of the loan is going to be paid over many time periods, therefore it should go on the balance sheet and not the income statement.
One thing that business owner should take note of however is the interest component of the loans or the leases should go on the income statement. Each month that they are paying interest should be entered into the expenses of the business on the income statement for that time says Edmonton bookkeeping.
By understanding how their balance sheets and income statements look, and why certain things are put in each report can help entrepreneurs not only enter in the information correctly but start to understand that they are reading when they look at their balance sheet and income statement. By doing that, they will be able to start making more informed economic decisions in their business that can help them not only avoid financial disaster but also be strategic with how they grow their business.
It is very important for entrepreneurs to learn early on in their business the differences between loans and leases and how that relates to their financial statements says Edmonton bookkeeping. By learning this early on in their business, entrepreneurs will be able to gain a deeper understanding of the cash flow in their business and use that information strategically to be able to plan their own growth. When they learned this, not only will they be able to avoid the high failure rate that entrepreneurs face in Canada, they will also be able to orchestrate their success, and grow their business.
It is important to understand the difference between loans and leases because the difference means they need to be booked into the financial statements differently says Edmonton bookkeeping. In order to understand the difference, an entrepreneur must consider what the intent for the loan or the lease is. For example, the goal of a loan is for an entrepreneur to end up with an asset. The money that they are paying is going to results in them having an acid in their business that will bring value to that business. Therefore, loans should be put into the asset section of the balance sheet.
Leases, on the other hand, do not have a goal of ownership at the end of the term. For example, says Edmonton bookkeeping, entrepreneurs can look at their own rent for their business space. At the end of the term, they can either sign another lease or leave the space. They are never going to be able to lease their office space long enough that they are ever going to own it. Therefore, because it requires an entrepreneur paying a bunch of money without receiving an asset and return that is going to add value to their business, it is considered a liability. These types of leases are called operating leases.
And then there is a type of lease called a capital lease says Edmonton bookkeeping. While it is not a foregone conclusion that an entrepreneur is going to own the assets at the end of the term there might be options written into the term that indicate that an entrepreneur has the ability to own that item, and in that case, the capital lease would be structured like a loan and considered an asset and not a liability.
In order to determine if the lease is a capital lease, an entrepreneur should look at the terms of the lease. For example, if an entrepreneur has the option to buy the assets at the end of the term for one dollar, the assumption is going to be that the entrepreneur is going to buy it for that discounted rate. Also, entrepreneurs who are leasing the asset for longer than 75% of the asset’s useful lifespan, the assumption is the business owner is not going to give that asset back to the leasing company because it is going to be worthless to them. Therefore capital leases should be considered assets.
By understanding how to do the accounting for loans and leases, and what the difference between a capital lease and operating lease says Edmonton bookkeeping can help entrepreneurs understand their business finances a lot better. When there able to read and understand their financial statements including their balance sheet and income statement, entrepreneurs can use that information to be strategic about their financial spending in their business.
