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However, there are many questions that entrepreneurs have when it comes to doing the accounting for loans and capital leases. The reason why this is important to learn is entering the information incorrectly can result in an entrepreneur not understanding the cash flow in their business. One of the first questions that entrepreneurs often have is what financial statement should the loans and leases be put into, the balance sheet where the income statement? Edmonton bookkeeping recommends that entrepreneurs understand what the balance sheet and income statements are for so that they become very clear where the loans and leases should be put.
The income statement is tracking financial performance over one month’s time. Using the revenue, cost of goods sold and expenses from that exact time period only the information that is for that time. Should be put into this financial statement. That means, loans and leases are for the overall benefit of the business, which means it does not belong on the income statement. The balance sheet, on the other hand, tells the overall financial position of the business including all of the assets, all of the liabilities and all of the equity in the business. Since the leases and loans are affecting assets and liability of the business, this is where should be entered.
The next question that entrepreneurs often have when it comes to accounting for loans and leases, is should they put all of the loans into one account? This is extremely important that entrepreneurs are actually setting up new accounts in the balance sheet for each one of their loans. They should never be called mingling of loans or leases ever. The reason why, is so that entrepreneurs can simply look at the balance sheet, and see every loan or lease that they have the business, as well as how much they have left owing on it.
When an entrepreneur looks at a six-month comparative statement of the balance sheet, which Edmonton bookkeeping recommends business owners do on a regular basis, they should be able to see the consistent decrease of the main loan accounts month-to-month. They should be familiar with how much their pain each loan, so when they see the consistent decrease to the loan account, they can verify that it is the correct amount.
When entrepreneurs learn how to do the accounting for loans and capital leases, they will be better prepared to catch mistakes on their financial statements, as well as be more prepared to use that financial information to make better business decisions. Learning how to do this early on in their business, not only can entrepreneurs be better and avoiding going out of business, but also be better at growing their business as well.
Most entrepreneurs do not have any entrepreneur experience when they open their first business says Edmonton bookkeeping. And is because they are good at providing that product or service that their business sells, that does not mean they are good at running that business. As Michael Gerber, the author of the myth has said, ìthe fatal assumption is: if you understand the technical work of the business, you understand a business that does that technical work.î Therefore, business owners need to work hard at learning all about their business finances as they operate their business in order to succeed.
There are many questions entrepreneurs have especially when it comes to doing accounting for their loans and leases that can help them ensure the accuracy of their financial statements. The biggest question that entrepreneurs ask is what is the difference between a loan and a lease. Typically, Edmonton bookkeeping says that loans are designed to give an entrepreneur an asset at the end of the payment terms. Whereas leases typically do not. If entrepreneurs think of the rent for their business space, that lease is not going to end up with them owning the space or the building that they are located. These leases are called operating leases.
However, entrepreneurs should also be aware of capital leases, because they are legally structured like a loan because the transaction is more geared towards ownership. That means entrepreneurs need to understand when a leases a Police so that they can book and recorded the same way that they book and record loans. In order to determine if the lease is a Lease or not, an entrepreneur should look at the terms of the lease. If there is an opportunity to buy out the lease at the end of the term for extremely low rates like one dollar, and that is going to be capital lease. The assumption will be that the business owner is going to want to buy that out for such a low rate, therefore it is actually structured to have the entrepreneur own the asset at the end.
Edmonton bookkeeping says that the other indication that the leases actually a capital lease is if an entrepreneur is leasing the asset for longer than 75% of that assets useful life. At the end of the term, the asset will not hold value for the leasing company, and the business owner will essentially own it.
Therefore, entrepreneurs need to understand the difference between loans, Leases and operating leases and how to book each one into the financial statements of the business. When they learn that, they will be able to ensure the accuracy of their balance sheets and income statement, and learn how to use that information in their business to make economic decisions that can help them grow their business.
