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Edmonton Bookkeeping | Helping Entrepreneurs Understand Loans On Balance Sheets

Not only do many entrepreneurs struggle to understand how loans and leases appear on their financial statements says Edmonton bookkeeping, but entrepreneurs also struggle with understanding their financial statements, to begin with. Many entrepreneurs struggle with understanding basic business financial literacy, causing them to not understand their business finances including cash flow. Understanding how to read the financial statements of the business especially when it comes to balance sheets and income statements can help entrepreneurs make more informed financial decisions in their business.

One of the first things that entrepreneurs should know when it comes to understanding the financial statements of their business, is that their loans should appear in separate accounts on their balance sheet says Edmonton bookkeeping. The reason why loans and leases appear on the balance sheet is that the balance sheet is describing the entire financial position of the business including assets and liabilities. Loans will appear under the asset section because an entrepreneur is going to end up with an asset at the end of the payments. Leases, on the other hand, are going to show up under the liabilities section, because they do not result in assets at the end of the term.

By understanding where loans and leases are going to appear, it is next for an entrepreneur to understand that each lease and loan should be in their own accounts within that balance sheet says Edmonton bookkeeping. The reason why is so that entrepreneurs can look at their balance sheet, and see very clearly all leases and loans that they have to make payments on every single month.

The next thing that an entrepreneur will need to do says Edmonton bookkeeping is reviewing the balance sheet on a monthly basis. Ideally, they will be looking at a six-month comparative statement, which will show six months at a time. The thing that an entrepreneur should be looking for is that the loan accounts will have decreases every single month. Not only should they be decreasing every single month, but they should decrease by the same amount every single month as well. That way, if an entrepreneur sees a decrease, they will know for sure that those lease and loan payments are coming out.

If they see that a lease or loan account did not have a decrease in a month, that could be due to misclassification, accidentally putting the loan amount in the wrong loan account, or ultimately, an entrepreneur may not have made that payment. By understanding how to look at their balance sheet in order to keep track of their loan payments can help minimize errors, and ensure that an entrepreneur is making their payments consistently.

By understanding how leases and loans should look can help entrepreneurs not only understand if they are making payments correctly, but also correct their financial statements in order to be able to understand cash flow in their business better but ultimately so that they can make financial choices in their business that will help them grow, and will help them avoid spending money that they do not have.

Edmonton Bookkeeping | Helping Entrepreneurs Understand Loans On Balance Sheets

In order to help entrepreneurs understand the cash flow in their business as well as how to use financial statements to make better financial purchases, Edmonton bookkeeping says that entrepreneurs should understand the differences between leases and loans in their business and how that affects their bottom line. When they understand this, they will be able to more accurately read the financial statements that can help them know when they can spend money and when they cannot. By learning this, entrepreneurs can avoid spending money they do not have, which could potentially cause them to run out of money in their business.

It is very important that entrepreneurs understand the difference between a lease and alone because one is considered an asset and the other is considered a liability. Therefore, where it exists on the balance sheet will change. Loans are what it is called when an entrepreneur is making payments on an asset that they are going to own at the end of the payments. Any assets that they might get a loan for that might include vehicles, equipment or machines that they need to do their job are examples of loans for assets. Because an entrepreneur will end up with the assets at the end of the payment it is considered an asset of the business.

Leases, on the other hand, do not have the intended outcome of the entrepreneur owning that asset. Entrepreneurs can think of it in terms of rent. At the end of their term, they do not own their office space, they either have to sign another term and keep paying, or leave the space. Other examples of leases say Edmonton bookkeeping would be a vehicle lease. Because an entrepreneur will not end up with an asset at the conclusion of the term, it is considered a liability of the business.

With how different leases and loans appear on the financial statements of the business, entrepreneurs should also understand what a capital lease is. Even though the title says it is a lease, and many entrepreneurs might want to put it in the liability section of the balance sheet, Edmonton bookkeeping says that capital leases are actually structured like a loan, because of the outcome of the transaction looks more like ownership. For example, if an entrepreneur is leasing a machine, that at the end of their term they have the option of purchasing it for a dollar, that is actually an indication of a capital lease. Because the entrepreneur will own that item at the end of the term, it is an asset.

By understanding the difference between capital leases and leases, and how that appears on the balance sheet can help entrepreneurs end up with financial statements that will allow them to understand the cash flow in their business, and be able to use that to successfully grow their business.