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 | Learning The Difference Between Loans And Leases


If entrepreneurs do not understand the different loans and leases when updating their financial statements says Edmonton bookkeeping, they will end up with incorrect balance sheets and income statements, and an inability to understand their cash flow because it will be wrong. There are several things that entrepreneurs need to learn when it comes to how to book their loans and leases to end up the most accurate financial statements so that they can use the information to help run their business effectively.

One of the first things that business owners need to understand when booking their loans and leases in their accounting software, is that each loan account needs to have a separate account on financial statements. There should be no co-mingling of loans, no matter how small they are, or how much the loans are related to each other. That way Edmonton bookkeeping says that business owners can look at the balance sheet easily and see every single loan and lease that they have in their business.

The reason why it is important that an entrepreneur is able to see every lease and loan on their balance sheet, is so that when they are looking at their statement, especially a six-month comparative statement they will be able to see every loan account, and how the amount left owing decreases over time. As the business owner pays off each loan and lease, the amounts left owing should decrease consistently. If a business owner discovers that there is one month where the loan or leases are not decreasing on the balance sheet, that is usually due to an error, or an entrepreneur actually missing the payments.

If an entrepreneur has made a mistake booking the loans or leases into their accounting software, the two most common errors would be a business owner excellently putting the loan amount in the wrong loan account, which not only would result in one loan not having a decrease in a month but it another loan would have a larger than normal decrease in that same month. Or, an entrepreneur might have completely misclassified that amount elsewhere in the financial statements. A business owner should simply look for a place in the financial statements where that exact amount that should have been applied to the loan has been entered.

Edmonton bookkeeping says that if an entrepreneur looks into the financial statements and discovers that there is no errors, they should check their bank statement in order to see if the business owner simply did not make the loan payment that month. If they do not see the charge going through their bank account, business owners can then make the payment so they do not default on the lease or loan.

When entrepreneurs understand how to read their financial statements especially their balance sheet and income statement says Edmonton bookkeeping, they can ensure the accuracy of their financial statements, as well as understand how to use the information to make the best financial decisions for their business.

Edmonton Bookkeeping | Learning The Difference Between Loans And Leases

One of the things that business owners struggle with is understanding their financial statements says Edmonton bookkeeping. In fact, into it, who is the company behind accounting software QuickBooks did a survey of small business owners and quizzed them on basic business financial literacy. 82% of all of the respondents scored 70% or lasts. This indicates how many entrepreneurs truly struggle with understanding their business finances. They’re able to learn how to read their financial statements, and especially how to do the accounting for the loans and leases that they have, they will be better able to make more informed business decisions based on their current and accurate financial situation.

In order for a business owner to learn how to do the accounting for loans and leases, they should understand the difference between the two. Loans are what an entrepreneur typically gets when they are purchasing something, and are going to own an asset when they are finished paying the loan. Edmonton bookkeeping says that leases, on the other hand, are when an entrepreneur is simply renting the equipment for space, and at the end of the term that they are not going to own anything.

The reason why these need to be differentiated, is because they appear on the financial statements differently. While a loan ends up with an entrepreneur owning an asset, is booked in the asset section of the balance sheet. Leases, on the other hand, are a liability, because entrepreneurs paying money and they are not building equity in their business. By understanding the difference between these two, entrepreneurs can ensure that there putting them in the right place in the balance sheet, so that they can end up with an accurate picture of the cash flow in their business.

However, entrepreneurs should also be aware of what a capital lease is. Entrepreneurs might see the capital lease, and assume that it should go in the liability section of the balance sheet but this would be incorrect because capital leases are structured legally like loans because the end goal of a capital lease is designed to end with the business owner owning the asset. In order to determine if a lease is a capital lease, a business owner should consider what the end goal of the lease is.

For example, if a business owner has a discount buyout option at the end of the term of the lease, that is an indication that it is a capital lease because they are assuming that the entrepreneur is going to want to buy the asset at that extremely low discounted price. It is very common for business owners to see a one-dollar buyout option at the end of their lease.

When entrepreneurs understand how to do the accounting for loans and leases, they can end up with more accurate financial statements in their business, that will be able to help them make informed business decisions, and avoid running out of money in their business.