Edmonton Bookkeeping | Are Leases Considered Assets Or Liabilities

One of the first things that an entrepreneur needs to keep in mind they are dealing with loans and leases in their business, is they need to ensure that they have enough profit in their business to make the principal payments. They need to be looking at their financial statements prior to obtaining financing to ensure that they have the profit in their business to make those payments. Edmonton bookkeeping says that if they do not, they are putting their business at risk of running out of money.

When understanding if a lease is an asset or liability, entrepreneurs need to consider what the end goal of that lease is. Most leases are called operating leases and are designed for the entrepreneur to not own that asset at the end of the term. Edmonton bookkeeping says that entrepreneurs can think very easily of their rent as an example of an operating lease. They pay that lease forever, and when the term is up they do not own their space. They either have to sign another term or leave the space. Therefore, operating leases are considered liabilities, because it is paying money with no gain. And typically, when entrepreneurs signed leases, they are usually going to be leasing for the rest of their business.

Loans, on the other hand, are considered assets because at the end of the payment, the entrepreneur owns that asset. However, entrepreneurs need to understand that capital leases even though there is lease in the name are actually legally structured like loans. The reason why, is because the transaction has a goal of ownership. Therefore, entrepreneurs need to book and record capital leases in the same way that they would record alone.

Edmonton bookkeeping says that entrepreneurs who learn that capital leases are assets, and operating leases are a liability they can end up with the most accurate financial statements in their business. Having accurate and up-to-date financial statements, entrepreneurs will be able to use that information to make informed and strategic financial decisions that can not only help their business avoid making bad financial decisions, that help them make strategic financial decisions that would result in the growth of their business, and them succeeding.

Edmonton Bookkeeping | Are Leases Considered Assets Or Liabilities

If business owners think that because their good at providing the product or service that they sell that bill be good at running a business, Edmonton bookkeeping says that they have a lot of learning to do. Most business owners struggle with understanding business finances, but when they take the time to learn it can impact their business for the best. Therefore, it is very important for entrepreneurs not only to learn how to read their balance sheets and their income statements, but also how to account for loans and capital leases on their balance sheets so that they can end up with accurate financial statements, and understanding what their cash flow in their businesses.

The most important thing that an entrepreneur needs to learn is that loans and leases need to go on the balance sheet of the business and not on the income statement. An income statement shows the financial performance over a specific time period, such as a month. If an entrepreneur was to put a loan or a lease on the income statement, it is going to significantly negatively impacts how the financial performance of the business looks. This is unfair since the asset that is being leased or purchased is going to benefit the business as a whole, it should not negatively impact one month financially. However, business owners need to understand that the interest of their payments goes on the income statements, for every month that there paying interest.

Therefore, leases and loans should appear on the balance sheet. Since a balance sheet tells the entire financial position of the business, all loans and leases should be indicated here, because they are going to benefit the entire business as a whole. However, entrepreneurs need to understand that loans are going to end up with an entrepreneur owning an asset therefore it should go under the asset section of the balance sheet. Leases are considered a liability however because it does not end up in the ownership of anything.

It is very important that entrepreneurs not only ensure that they are accounting for loans in leases accurately so that they can end up with accurate financial statements but also, it is important to have this information accurate so that entrepreneurs can qualify for financing later on in their business as well. Edmonton bookkeeping says that financial institutions and banks want to see more assets being paid for than liabilities, not only because it shows that an entrepreneur is responsible with making payments, but the more loans an entrepreneur has, means the more an entrepreneur is building equity in their business, which is important for the bank to know before granting financing.

When entrepreneurs understand how to do the accounting for loans and leases, not only can they end up with accurate financial statements that can help them make informed business decisions, but they can also ensure that they be able to obtain financing later on in their business when they need it so that they can continue growing their business and being successful.