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In order to help entrepreneurs understand how to do the accounting for their loans and capital leases, entrepreneurs should first understand that loans and leases get put into the balance sheet of the business and not the income statement. Edmonton bookkeeping says that many entrepreneurs mistakenly put in the income statement, thinking that since they made the deal for the lease of the loan in that specific month, that is for it belongs. However, it actually belongs to the balance sheet, because it is providing the business a prolonged asset or liability. If an entrepreneur puts a lease are alone in the income statement of the month, it would make that month look like it was extremely unprofitable, even if it was very profitable. It needs to go on the balance sheet so that it can inform the overall financial position of the business.
Once an entrepreneur understands that the loan or lease should appear on the balance sheets, they need to understand where the balance sheet goes and how it should be indicated. Edmonton bookkeeping says that every single long should have its own separate account on the balance sheet with absolutely no cold mingling. That way, when an entrepreneur looks at their balance sheet, they can see every single loan or lease that they have in the business, and how much is left owing on that total. If they are looking at a six-month comparative statement which is recommended, then they will be able to easily see over time, how the regular payments they are making on those loan accounts are decreasing the amount of money that they owe.
It is important that an entrepreneur also pays attention to how those loan accounts are decreasing month over month. Edmonton bookkeeping says that this is easiest to see and a six-month comparative statement, and what an entrepreneur should also be looking for is if there is an inconsistent decrease or no decrease at all. Because those can be indicated of errors in the accounting or an indication that entrepreneurs missed that payment. By fixing one of those issues, can help an entrepreneur end up with accurate financial statements, as well as staying up-to-date on their loan payments.
By learning how to do this early on in their business ownership, Edmonton bookkeeping says that business owners can learn how to make more informed economic decisions in their business that not only can help them avoid disaster but actually can help them be strategic in their growth and become successful.
Many entrepreneurs struggle with understanding basic business finances says Edmonton bookkeeping. In fact, the company behind QuickBooks, Intuit did a survey of small business owners in order to find out how financially literate they are. The vast majority of respondents, 82% to be precise scored less than 70% on the quiz. This shows how most business owners struggle at understanding their business finances. Since 50% of entrepreneurs end up failing, teaching them how to understand their financial statements can help them avoid this failure rate.
When it comes to understanding how to do accounting for loans and leases in their business, entrepreneurs should understand that leases and loans are accounted for differently. The reason why is a loan is when an entrepreneur is building an asset for their business. The payments that they are making are ultimately going to end up an entrepreneur owning something that is going to give their business value. Elise, on the other hand, does not end up with an entrepreneur owning anything at the end of the term. Edmonton bookkeeping says entrepreneurs can simply think about their business space rental. They have to pay that rent for the life of their business, and if they decide to stop paying, they have to vacate the premises. Therefore, it is considered a liability because an entrepreneur is not bringing more value to the business. This lease is called an operating lease.
However, Edmonton bookkeeping says that there is a type of lease that aims to end and ownership. It is not a foregone conclusion that it will end in ownership, but the terms of the lease are structured in such a way that makes it very easy for an entrepreneur to own that asset at the end of their term. These are called capital leases. Entrepreneurs should understand that a capital lease is legally structured like a loan because the goal of the transaction is geared towards ownership.
How an entrepreneur can determine if the lease that they are signing is a capital lease, is by looking at the buyout option at the end of the term. If the lease has an option for the entrepreneur to buy the asset at the end of the term for one dollar, that is an indication of a capital lease.
Another way that an entrepreneur can determine if the lease that they are signing is actually a capital lease is continuing to look at the term. For example, if the term of the lease is for longer than 75% of the asset’s useful life, that is a capital lease. If an entrepreneur is going to be paying for the item for almost the entire useful lifespan is a good indication that they are probably going to own debt the end.
When entrepreneurs are able to understand how to do the accounting for their leases and loans, they will end up not only with accurate financial statements but an understanding of how to read those financial statements, so that they can end up with the most accurate financial information to base their monetary decisions on.
