Free consult & free copy of book

E-Myth – “Why most small businesses don’t work & what to do about it”

Contact Us

Stars

Most 5 star CPA Google reviews in Canada

Read Reviews

Chartered Professional Accountants E Myth

1 Fixed Monthly Fee - Planning | Accounting | Taxes | Consulting

Helping Canadian businesses beat the odds!

Edmonton Bookkeeping | How Capital Leases Pair On The Balance Sheet


When it comes to understanding the finances of the business, edmonton bookkeeping says that it is important for entrepreneurs to understand how to read their balance sheet and income statement especially when it comes to managing their leases and their loans. When entrepreneurs are better able to understand the financial statements of their business, they will gain a deeper understanding of the cash flow in their business and be able to make more informed financial decisions as well.

When looking at their financial statements, entrepreneurs should understand that each lease and loan account will have separate accounts listed on the balance sheet. That way, an entrepreneur will be able to see every loan or lease that they have in the business very easily, so that they can see if regular payments are being made. Also, seeing all of the leases and loans in one place can help an entrepreneur decide if they are able to afford to make more purchases in their business, or taking on more payments in their business.

When entrepreneurs are making a payment on their leases or their loans, that payment needs to be posted to the balance sheet instead of the income statement. Many entrepreneurs believe it should be the income statement, that this is untrue. Edmonton bookkeeping says that it should be on the balance sheet because it deals with the principal payment. The interest component belongs to the income statement, however, if an entrepreneur does not know the exact interest amount, they can leave it in the balance sheet in its separate individual account.

It is important that business owners look at the loan and lease accounts on the balance sheet consistently says Edmonton bookkeeping. It is best if they can look at six-month comparative statement so that they can see if there has been a consistent decrease to the loan accounts on a monthly basis. By seeing this, it will show an entrepreneur that they are regular payments being made to the loans and leases that they have. If they see that there is a month where that decrease did not happen, that usually indicates either a mistake or that payment did not happen.

It is also another important thing that entrepreneurs need to understand that they need enough income to cover all of their principal payments for all of their lease or loan accounts. Edmonton bookkeeping says that if they are not using profit to pay their leases or loans, they are making their business use money that should be going towards another payment. If they do this, they will get a negative balance in their business. If they do this often enough, it will cause an entrepreneur to run out of money in their business. For example, if an entrepreneur needs to repay thousand dollars to a loan, but they do not have a thousand dollars of profit in their business, they have to make that payment using money from somewhere.

By understanding how their leases and their loans look on their financial statements can help entrepreneurs make more informed financial decisions in their business, which can help them not only avoid running out of money in their business but learn how to make decisions that can positively impact their business and allow them to grow.

Edmonton Bookkeeping | How Capital Leases Pair On The Balance Sheet

Once an entrepreneur has learned how to read the loans and leases on their balance sheet says Edmonton bookkeeping, the next thing they can learn is how loans and leases are different, and how those differences affect the business’s bottom line. Ultimately, loans are an entrepreneur building equity because they are going to end up with assets at the end, whereas leases are considered an expense of the business, because not nor does not gain anything at the end of the term.

Not only is it important for entrepreneurs to understand the difference between a loan release, but at the capital, a lease is actually structured like a loan, because the transaction is intended to end and ownership. Therefore, entrepreneurs need to understand that they have to book and record capital leases the same way that the book and record loans.

While many entrepreneurs might understand that capital leases will behave like loans on the balance sheet, but they need to understand what makes a lease a capital lease says Edmonton bookkeeping. Because the goal of a capital lease is to end and ownership, a business owner needs to look at what the terms are of the lease from the beginning. If an entrepreneur is going to end up with the option to buy out the lease at the end of the term for an extremely discounted rate, that will be considered a capital lease. Since most business owners are not going to get to the end of paying for this asset for years, and then not purchase it for a very small amount of money.

Another indicator that a lease is actually going to be a capital lease is if the lease term is for 75% or more of the assets’ useful lifespan. Therefore, an entrepreneur needs to be aware of how long that useful lifespan is, and if they are going to be paying for that item for almost its entire useful life, that is essentially ownership.

An easy way for entrepreneurs to keep this in mind is that with loans and capital leases, the aim is to own the assets, and looks like building equity on the financial statements of the business. Leases, on the other hand, is something that an entrepreneur will not own at the end of the term. Because of this, it is considered an expense of the business. The only options they have is to stop paying, and no longer have access to that asset, or continue paying. Business owners can think of rent when understanding what a lease is.
By understanding the difference between loans and leases, entrepreneurs can read their financial statements more clearly, so they can fix errors, and use the information to make better choices in their business financially. This is extremely important to do in order to ensure that entrepreneurs are not making decisions that could cause them financial hardship or when out of money in their business. When they do this consistently, the label to grow their business and be successful.