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Many entrepreneurs struggle with understanding business finances says Edmonton bookkeeping. Intuitís, the company that makes accounting software QuickBooks did a survey of small business owners on their basic business financial literacy. People who responded to the quiz were asked questions about what the role of a balance sheet is, what is an accrual and how they can improve cash flow in their business. 82% of all of the respondents scored lower than 70% on the test. This demonstrates that many entrepreneurs struggle with this. With the high failure rate of businesses in Canada, when entrepreneurs are able to learn how to understand their business finances, they can make better decisions and become successful.
When entrepreneurs are learning how to understand their financial statements, they should also learn how to do the accounting for loans and capital leases as well. Not only can knowing how to do this accurately and up incorrect up-to-date financial statements, and it also will help an entrepreneur know what their cash flow in their business is, so that they can end up being able to make informed financial decisions in their business. They have many questions that will help them understand this. By answering these questions, Edmonton bookkeeping says that entrepreneurs will understand how to do the accounting for loans and leases in their business.
The first question that entrepreneurs have is what is the difference between a loan and a lease? This is an extremely important one because loans and leases get booked differently on the balance sheet. A loan has the goal of an entrepreneur owning that asset at the end of their term. Therefore, an entrepreneur that is paying alone is building equity in their business and obtaining an asset. On the other hand, leases do not have the end goal of ownership and are then considered a liability of the business. Loans should get accounted for in the asset section of their balance sheet, and leases should get booked in the liability section of their balance sheet.
The second question that entrepreneurs often have is there a difference between a lease and a capital lease? This is another important determining factor. Leases that have no goal for an entrepreneur to own and assets at the end of the term is actually called an operating lease. An entrepreneur that signs and operating lease know that it the end of the term their two options are to sign a new lease or walk away from it. Edmonton bookkeeping says that business owners can think of their office space rent as an example of an operating lease.
Capital leases on the other hand are actually legally structured like a loan because even though it is structured like a lease, though have terms that allow an entrepreneur to purchase the asset, so the goal of the capital lease is for an entrepreneur to own the assets and should be considered an asset instead of a liability.
Edmonton bookkeeping says a when entrepreneurs understand the difference between loans, leases, and capital leases, they will be more prepared to be able to account for them properly on their balance sheet. This will allow them to end up with the most accurate financial statements that they can then use to make informed business decisions.
If entrepreneurs are not accounting for loans and leases properly, not only does that result in incorrect financial statements says Edmonton bookkeeping, it also ends with an entrepreneur not having the ability to understand the cash flow in their business and negatively impacting their ability to make informed financial decisions in their business. Since an entrepreneur should be reviewing their financial statements prior to making any financial decisions whether it is paying vendors, paying bills or running payroll, if an entrepreneur makes those decisions without consulting their accurate financial statements first, they could put their business at risk of running out of money. Therefore, entrepreneurs should learn how to do the accounting for loans and leases, so that they can make more informed financial decisions in their business.
Entrepreneurs should understand the answer to these questions that can help them understand how to do the accounting for loans and leases more accurately. The first question that entrepreneurs often have is can report capital leases properly help a business get more financing? This is absolutely true, and in addition to an entrepreneur ending up with the best financial statements to make informed financial decisions, a great secondary reason why it is important for an entrepreneur to account properly for capital leases is that it can help them obtain financing in the future. Because capital leases will end up with an entrepreneur building equity in their business, financial institutions like to see more capital leases or loans, because not only is an entrepreneur making their business more profitable, more successful and worth more money, at the end of the term, not only does the entrepreneur have an asset, but they have a bunch of money that they are used to paying, meaning they should be able to continue making payments in the future, with no problems. That free money that they will have when the loan or capital lease is done gives a financial institution are bank peace of mind that the free money will allow them to pay for a loan in the future.
Another question entrepreneurs often have is how can they tell that a lease that they have is actually a capital lease? Edmonton bookkeeping says that entrepreneurs can tell based on the terms of the lease. For example, if the lease has a discounted buyout option at the end of the term, that is one of the factors that determines if it is a capital lease or not. For example, if an entrepreneur has the option to buy the asset for a dollar at the end of their lease, the goal of the lease is ownership and would be considered a capital lease. Another way that entrepreneurs can determine if their lease is a capital lease or not, is if the term of the lease is for longer than 75% of the asset’s useful lifespan. If they are going to be paying for it for almost as much time as it is useful, that indicates that it is going to be a capital lease as well.
When entrepreneurs understand the differences between loans, capital leases and operating leases, they will be able to do the accounting more accurately, and end up with the most correct financial statements. When they have the most accurate and up-to-date financial statements, when entrepreneurs look at this statement prior to making financial decisions, there is a greater chance that they will be able to make decisions that will positively impact their business.
