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One of the most common questions business owners have about their financial statements is how loans and leases show up says Edmonton bookkeeping. When entrepreneurs are not sure how to read to their financial statements, they end up being unable to understand the cash flow and are potentially making financial errors. In fact, a survey done by it showed that business owners struggle with understanding basic business financial literacy. 82% of all of the respondents scored 70% or less on this quiz. When business owners are able to understand their business financing, there able to make better financial choices.
When entrepreneurs are looking at their financial statements, leases and loans will appear on the balance sheet instead of the income statement. The reason why is because the balance sheet tells an entrepreneur the entire financial position of the business, while the income statement tells the financial performance over a specific period of time. Since the leases of the loans that an entrepreneur has is to benefit the entire business as a whole, it should appear on the balance sheet and not on the income statement.
When looking at the balance sheet, Edmonton bookkeeping says that business owners should ensure that each loan or lease has its own account. The reason why is so that when the business owner looks at the balance sheet, they will be able to see every single lease or loan that the business owner has in the business.
When an entrepreneur is reviewing their balance sheet, they should ensure they ask their Edmonton bookkeeping company for a six-month comparative statement. The reason why is so that when they review the statement, they will be able to see the consistent decrease to the loan accounts each month. This indicates that the payment has been made for each loan consistently. If for some reason, the loans do not decrease in one month, or only one loan did not decrease, that is usually an indication of an error such as an entrepreneur putting the loan into the wrong loan account, or miss classifying it elsewhere in the financial statement. When a business owner sees that their loan accounts did not decrease in a certain month, they should look for both of those errors.
When they do not see the errors in their financial statements for loan accounts being in the wrong account or misclassified, the next probability is that the loan was not paid in that month. They can verify this quickly says Edmonton bookkeeping by looking at their bank statement, to verify if the payment came out or not. If it did not, an entrepreneur can quickly make that mistake before potentially defaulting on the loan, and ensuring that their financial statements are correct.
When business owners are able to learn how to read their financial statements, they are not only able to catch mistakes and ensure the accuracy of their reports, there able to also use that information to make more informed financial decisions in their business, and be successful.
If business owners are not accounting for loans and leases accurately, Edmonton bookkeeping says it causes their financial statements to be incorrect. Incorrect else sheets and income statements lead to entrepreneurs making poor financial choices and putting their business at risk of running out of money. Therefore, it is very important that entrepreneurs learn early on in their business how to read their balance sheets and income statements so that they can make better decisions and correct mistakes.
Another thing that business owners should be understanding when it comes to their financial statements says Edmonton bookkeeping is how leases and loans look on those financial statements. The balance sheet is where both of those are going to appear, however, entrepreneurs need to understand that loans are considered an asset of the business because entrepreneurs building equity, while leases are considered a liability because there is no intention for the business owner to keep the asset the end of the term. A great example of this is rent. At the end of the term, an entrepreneur does not get to keep their office building, or own it, they will pay that rent forever until they move.
Once an entrepreneur understands loans and leases show up differently on the balance sheet, it is important that entrepreneurs understand that a capital lease is legally structured like a loan. Therefore, if entrepreneurs are putting capital leases in the liability section of their balance sheet, their causing errors. The way an entrepreneur can determine if the leases that they have are capital leases or this regular leases is how the terms are structured.
For example, Edmonton bookkeeping says that if the lease has a very reduced biota cost at the end of the term, that could be a determining factor that it is in fact a capital lease. If a business owner is paying an asset that has a one-dollar buyout at the end, since the entrepreneurs most likely to purchase that asset for a dollar the end of the term, that is considered a capital lease because the transaction is geared towards ownership.
Another example of how a lease actually is considered a capital lease is if the lease term is for longer than 75% of the lifespan of the asset. Since the business owner is paying for the item from us the entire useful lifespan of the asset is also considered a capital lease. Therefore, when entrepreneurs understand that a capital lease has the aim to own at the end and is equity building, the opposite is an operating lease where an entrepreneur is going to give up the asset at the end of the term and is considered an expense of the business.
Once business owners understand how leases and loans operate and how to tell a difference between a capital lease and operating lease, will be able to help ensure the accuracy of their financial statements particularly their balance sheet. By understanding this, not only can they help keep the statements mistake-free, but also be able to use them to make more informed financial choices in their business.
