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When entrepreneurs are learning how to read their financial statements, they should understand that the loans and the leases that they have their business must be accounted for correctly in their balance sheet. Loans should go into the asset section of the balance sheet, while leases should go into the liability section. Since loans are going to end up with an entrepreneur owning the assets that is why it is considered an asset. Bases are not going to end up with an entrepreneur owning anything and usually results in an entrepreneur having to continue to pay that lease, which is why it is considered a liability.
However, Edmonton bookkeeping says that entrepreneurs should be aware of something called a capital lease. If judging solely by the name, entrepreneurs would make the assumption that a capital lease should be entered into the liability section of their balance sheet but this is actually incorrect. The reason why is because capital leases usually have terms that include the ability to purchase the assets at the end of the lease. If an entrepreneur is looking at their leases, they will be able to determine which funds are leases that should go into the liability section of their balance sheets, and which leases should be considered capital leases and be considered an asset.
One important determining factor is what the buyout option is at the end of the lease. If there is an extremely discounted buyout price, the assumption is that the business owner is going to pay that very low buyout and own the asset. Some leases have such a low buyout option price as to be one dollar. When this is the case, entrepreneurs can assume that the lease is a capital lease.
Edmonton bookkeeping says that if the lease term is for longer than 75% of the asset’s useful lifespan, that is also an indication of a capital lease. Since the asset will have no value at the end of the lease, the business owner will usually end up keeping it, and it is considered a capital lease.
When entrepreneurs are able to understand the difference between leases and capital leases, will be able to understand how to do the accounting for those, and where to put them on the balance sheet so that they can end up with the most accurate financial statements possible. When they do this, entrepreneurs will be able to make more informed financial decisions, and strategically grow their business and be successful.
Learning how to understand the financial statements might be a difficult prospect is Edmonton bookkeeping, but there some easy things that entrepreneurs can learn early on that will make it easier to understand and read their financial statements as well as their cash flow. For example, how loans and leases should appear on their financial statements. Intuitís, the company that makes accounting software QuickBooks surveyed many small business owners in order to understand how much knowledge they had about basic business finances. 82% of all of the respondents ended up scoring 70% or less on the test. This shows how many entrepreneurs actually struggle with understanding this. Helping business owners gain a deeper understanding of this can help them make more informed financial decisions.
In order for entrepreneurs to understand their financial statements, they should learn that loans and leases are actually put on the balance sheet of the business and not the income statement. The income statements show the financial performance of a business over a specific time. Such as a month. This shows an entrepreneur their revenue, cost of goods sold and expenses for that month. Since loans and leases benefit the entire business as a whole, and not just in a specific time., It should not show up on the income statement.
In addition to that says Edmonton bookkeeping, an entrepreneur is going to pay that loan or lease over several time periods, therefore it should appear on the balance sheet because it deals with the assets, liabilities, and equity of the business. If an entrepreneur was to put loans and leases on the income statement, if have to ensure that it appears in the expenses section of every income statement, which not only is time-consuming but is also going to negatively impact the financial performance of that time period for the entire life of the loan or lease. Since it should not negatively impact the financial performance of a specific time period, but either provide an overall benefit or liability to a business, it should appear on the balance sheet.
The next thing that entrepreneurs should keep in mind when they are booking their loans and leases on the balance sheet, is whether it should go on the assets, or liability section. The easy way to remember this says Edmonton bookkeeping is if an entrepreneur is going to own the assets at the end of the term, it should go under assets. If an entrepreneur is going to not only those assets at the end of the term, it should be considered a liability. By understanding the difference between these two and accounting for them accurately, can help an entrepreneur end up with an accurate cash flow represented on their financial statements.
Edmonton bookkeeping can help entrepreneurs understand how to do the accounting for loans and capital leases if they have any questions. By learning this early on, entrepreneurs will be able to make informed financial decisions early in their business and avoid the high failure rate for entrepreneurs in Canada and build a successful business.
