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Edmonton Bookkeeping | How Loans And Leases Look On Financial Statements

Extremely important that entrepreneurs understand how leases and loans look on the balance sheets of the business says Edmonton bookkeeping. When they understand this, they can ensure that they are ending up with accurate financial statements, and the ability to see the accurate cash flow of their business. When business owners do not account correctly for loans and leases, they can end up with incorrect financial statements, and if they use those that statements to make business decisions, they could potentially put their business at risk.

It is extremely easy for entrepreneurs to learn how the loans and leases will look on their financial statements, therefore it is important that business owners learn this as early on in their business as possible. Since 15% of all business owners end up going out of business within the first year, the sooner business owners can learn this, the less likely they are going to go out of business within the first year. The very first thing that business owners can learn is that loans and leases get booked on the balance sheet. Edmonton bookkeeping says that most business owners assume that it should appear on the income statement because that is the month where they made the purchase or signed the lease. However, since leases and loans are designed to benefit the business as a whole, they should on the balance sheet because the income statement is only for things that affect that month alone.

When a not nor is booking their leases and loans on the balance sheet, they should also ensure that every single loan in every single lease has a separate account on the balance sheet. Nothing should be combing old no matter how small or related things are to each other. Edmonton bookkeeping says that once entrepreneurs separate out all of their loans and leases on the balance sheet, this will give business owners the ability to take a look at their balance sheet, and easily see all of the loans that they have in the business.

When an entrepreneur is reviewing their financial statements, they should review their balance sheet as the six-month comparative statements. That way, when they see all of their loans and leases over a six-month period, they should see that there is a consistent decrease to all of the loan accounts each month, as an entrepreneur pays off the balance. They should be familiar with how much each loan or lease payment is, and then verify that those accounts are decreasing by that amount consistently. If an entrepreneur finds that this is not the case, is either an air that they can fix, or the entrepreneur actually did not make that payment. By fixing the mistake, or making the loan payment can help keep business owner on top of their loans and leases.

When entrepreneurs understand how the loans in the leases that they have look on their balance sheet, entrepreneurs will gain a deeper understanding of the business finances as a whole, and be able to use that information to make more informed decisions in their business.

Edmonton Bookkeeping | How Loans And Leases Look On Financial Statements

One of the things that business owners struggle with says Edmonton bookkeeping is understanding basic business financial literacy. In fact, into it who is the company behind accounting software books surveyed small business owners in order to understand how much they knew about business finances. An overwhelming majority of the participants, 82% ended up scoring less than 70% on this test. That is a significant amount of business owners who lack an understanding of the business finances. Because of that, many entrepreneurs do not understand how to read their financial statements, which could negatively impact the decisions they make in their business.

When it comes to accounting for their loans and leases, an entrepreneur should understand the difference between a loan and a lease. With loans, Edmonton bookkeeping says that the goal is for the entrepreneur to end up with an asset at the end of the payment terms. Therefore, loans are classified in the asset section of the balance sheet, because an entrepreneur is purchasing an asset and building equity in their business.

Leases, on the other hand, do not have an ownership component. At the end of the term, an entrepreneur does not and up with an asset, therefore they appear on the balance sheet under the liability section. Edmonton bookkeeping says that a great example of a lease is the business owner’s office space. At the end of the term that has to re-sign the lease or leave and find another lease elsewhere.

However, entrepreneurs need to understand that there is one type of lease that actually has an ownership component to it. This is called a capital lease, and it is legally structured like a loan, and therefore should be booked into the asset section of the balance sheet. If an entrepreneur does not know this, they may book a capital lease in the wrong section, and end up with incorrect financial statements that do not accurately show the cash flow of the business.

An example of a capital lease would be if an entrepreneur is leasing a piece of equipment, and there is a one-dollar buyout option at the end of the term. Because it is assumed that business owners are going to take that buyout, the lease is actually considered more like a loan and should be booked that way.

Another indication that a lease is actually a capital lease is if the term of the lease is for longer than 75% of the lifespan of the asset. If the business owner is going to be paying for the asset for almost the entire useful life of the assets, that is also considered a capital lease says Edmonton bookkeeping.

When business owners understand leases and loans, and how to do the accounting for them, they can help ensure there keeping their financial statements accurate, so that they can understand their businesses’ financial position, and use that information to guide their business decisions. Anyhow to do this early on is important to help ensure an entrepreneur can grow their business successfully.