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One of the very first things that entrepreneurs should understand when it comes to loans and leases on their balance sheet, is that every single loan or lease account should have a separate account on the balance sheet. There should be absolutely no co-mingling of any loans or leases, no matter how small they are. The reason for that says Edmonton bookkeeping, is so that an entrepreneur will be able to look at the financial statements, and see every single loan clearly.
Once an entrepreneur can see where each of the loans and leases appear on their financial statements, the next thing they should understand is they should see those accounts decreasing in amount every single month. The amounts that an entrepreneur owes are placed into those accounts, and as they make the payment, they should see each of the accounts will decrease by the amount that they owe. For example, if they owe two thousand and rent every month, five hundred dollars in a vehicle payment every month, and two hundred dollars in payment for an asset that they purchased, they should see all of those amounts being decreased from each of the accounts every month.
If an entrepreneur sees those decreases in each account every month, and then one suddenly stops, or a different amount is decreased in a certain account, that is usually either a misclassification, or the amount was entered into the wrong loan account. A business owner can see this and fix the financial statement. If they see that the amounts that they have paid stops suddenly, and there is nowhere and the financial statements that amount shows up, the likely reason is because an entrepreneur missed making that payment. By understanding how loans and capital leases look on the financial statement, business owners can ensure that all the payments are being made consistently.
Also very important for business owners to understand that they need to have enough income in their business to cover the payments to all of their leases and loans. Before they obtain anymore financing, they should ensure that there being enough income to cover all of the principal payments. If they do not have the profit coming into their business to make those payments, they will have a negative balance of their income statement. This should be avoided, and ensure that business owners are able to pay leases and loans with income made in the business to avoid running out of money in their business.
When entrepreneurs understand how leases and loans appear on their financial statements, it will help them make more informed decisions. Edmonton bookkeeping says that this is very important for business owners to do as early on in their business as possible so that they can avoid running out of money in their business, and can become successful.
It is very important that business owners can start to learn how their loans and leases look on their financial statements particularly their balance sheets and income statements says Edmonton bookkeeping. The reason why is because if they do not understand this, and do not account properly for loans and leases, this will result in financial statements with errors, negatively impacting an entrepreneurís ability to make financial decisions in their business. Since 29% of failed entrepreneurs say that running out of money is the reason they failed, being able to understand the cash flow in the business and use financial statements to make informed decisions will help entrepreneurs avoid this.
It is very important that business owners understand that loans and leases are actually structured very differently, and look differently on the financial statements. With loans, an entrepreneur is building equity in their business, and are going to end up with an asset that they can use in their business. On the other hand, leases are not structured to help an entrepreneur build equity, or end up with assets. With leases, at the end of the term, the business owner does not get to keep the assets. Think vehicle lease or rent.
The exception to this rule is when it is a capital lease says Edmonton bookkeeping. The goal of a capital lease is for the entrepreneur to own the asset at the end of the term, therefore it is legally structured more like a loan than a lease. However, entrepreneurs need to understand what makes a lease capital lease. Since the intent is to own the asset, if a lease has a discount buyout option at the end such as a dollar, that is considered a capital lease.
Another criterion that turns a lease into capital lease Edmonton bookkeeping is if they are leasing it for longer than 75% of the lifespan of the asset. It is less likely that at the end of the lease an entrepreneur is not going to keep the asset, because the useful life is almost up. Therefore, if business owners see the term of the lease, and it is 475% or longer of the entire lifespan of the assets, they will be able to understand that it is a capital lease.
The reason it is important for the business owner to record capital leases properly is that it can help an entrepreneur get more financing because they are building equity. Instead of the lease, that is just an expense of the business, capital leases help entrepreneurs build equity in their business, and at the end of the payment, they will have a lot of additional money that they can use. Therefore it looks attractive to financial institutions to have capital leases because that means that an entrepreneur will have money at the end of the term.
When entrepreneurs are able to understand the difference between leases and capital leases, they will be able to read their financial statements better and be able to use the information entered into making informed business decisions that can help them grow their business successfully.
