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When the first things that entrepreneurs can do when they start their own business says Edmonton bookkeeping is learning how to read their financial statements. It is very important that an entrepreneur gets into the habit of reviewing their financial statements on a regular basis so that they understand what is going on in their business, but also so that they are armed with knowledge when they go to make financial decisions in their business. Before they disperse any payments whether it is payroll, paying bills, buying assets or even paying themselves, entrepreneurs need to be able to review their financial statements and understand the financial position of their business before dispersing money.
When it comes to ensuring the financial statements are correct, entrepreneurs should understand how loans and leases appear on their financial statements so that they can gain a deeper understanding of the cash flow of their business, as well as being able to catch errors and ensuring the accuracy of those financial statements says Edmonton bookkeeping.
The first thing that entrepreneurs should know, is that the loans and leases need to appear on the balance sheets of the financial statements and not the income statement. The reason why is because loans and leases benefit the entire business as a whole, and not just benefiting the business in that specific month. Since the balance sheet tells the overall financial position of the business, anything that benefits the entire business get booked here. The income statement on the other hand details the financial performance in a specific month.
When entrepreneurs are entering in loans and leases into their balance sheets, they need to ensure that there is a separate account for every single loan and lease there should be no co-mingling of amounts, no matter how big or small they are. No matter how many lease or loans they have, there should be a separate account for each one. Edmonton bookkeeping says that when entrepreneurs are looking at their balance sheet, especially one that six-month comparative statement, they should be able to see very easily all of the leases, as well as the consistent decrease to each loan account as an entrepreneur pays off the balance.
If they do not see the consistent decrease of each loan account, that might mean that an entrepreneur has made an error entering the lease or loan payment into their accounting software. They may have simply stuck it in the wrong loan account, which can easily be fixed by looking at the loan accounts that had a larger than normal decrease. Or, an entrepreneur might simply have misclassified it elsewhere in their accounting software. If they look at their financial statements and look for the amounts that should have come off the loan to see if that amount was put somewhere else, they can ensure the accuracy of their financial statements.
If entrepreneurs have any questions about how to do the accounting for loans and leases, they should contact their Edmonton bookkeeping company such as always bookkeeping. Not only will they be able to help ensure that they are doing it accurately, though be able to answer any other questions that entrepreneurs might have about reading their financial statements and using the information to grow their business.
Unfortunately, many entrepreneurs do not understand basic business finances says Edmonton bookkeeping. Because of that, they do not know how to read their financial statements and failed to understand their cash flow. They are not able to consult their financial statements prior to making a business decision, they put their business at risk. For example, if they do not review their financial statements in order to confirm that they have enough money to run payroll, it may end up with them running payroll, and bouncing checks that they have written. Therefore it is very important that entrepreneurs understand how to read to their financial statements, and learn how to make informed business decisions based on that information.
Entrepreneurs have learned that they need to put their leases and loans on the balance sheet, but they also need to understand the difference between leases and loans, so they can put them in the correct spot on the balance sheet. The balance sheet has a section for assets, liabilities, and equity. Loans will go in the asset section because an entrepreneur is going to own and assets at the end of making that payment. Leases, on the other hand, should go under the liability section says Edmonton bookkeeping, because at the end of the term, an entrepreneur is not going to own anything. For example, entrepreneurs can think of leases in terms of their office space rent. When the term of the office space lease is up, an entrepreneur will not own space.
The only time that this is not the case, is when it comes to capital leases. Even though they are called a lease, they are legally structured as a loan, because there is an option to buy the assets at the end of the term. If an entrepreneur is wondering what makes their lease capital lease says Edmonton bookkeeping, they just need to look at the terms. If there is an option to buy the assets at the end of the term for a very discounted rate, that is a capital lease. If an entrepreneur is leasing the assets for more than 75% of the asset’s useful lifespan, the business owner ultimately owns that. Therefore, business owners need to understand that a capital lease is a lease where the entrepreneur can potentially own the asset at the end. Leases that are true leases, and are going to end in ownership are called operating leases.
By understanding the difference between leases and capital leases can help entrepreneurs ensure that they are putting leases and loans into the correct section of their balance sheet so that they can end up with the most accurate cash flow information. Having the most up-to-date and accurate financial statements means that an entrepreneur will be able to use that information to help spend money in their business, and grow their business in a specific and measured way.
