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E-Myth – “Why most small businesses don’t work & what to do about it”

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Edmonton Bookkeeping | Typical Queries About Accounting For Capital Leases

When entrepreneurs struggle with understanding their business finances says Edmonton bookkeeping, they put their business at risk and necessarily. By either not having accurate financial statements to help them make informed financial decisions or not using them at all puts entrepreneurs company at risk. Business owners can make better decisions if they not only learn how to read their financial statements but also how to account for loans and capital leases in their business. The sooner an entrepreneur can learn how to do this, the better chances they have at beating the odds and business. 15% of all entrepreneurs fail in their first year, so entrepreneurs can learn how to do this within their first year, they can overcome those odds.

One of the very first things that entrepreneurs should take into consideration as early on other business as possible says Edmonton bookkeeping is they need to be able to read their financial statements in order to understand how much profit they have in the business. The reason why is because if they do not have the profit in their business to pay a lease or a loan payment, they will put their business at a negative balance. If they never have that profit in their business, they eventually will run out of money. Therefore, it is extremely important for entrepreneurs to understand income statements and balance sheets and if they can afford to get financing in their business.

When an entrepreneur does get financing and they have leases and loans, they need to know how to enter those loans into their accounting software, so that their balance sheet and income statement can be accurate. The first thing that entrepreneurs need to understand is that leases and loans should appear on the balance sheets and not the income statement. Entrepreneurs often believe that goes on the income statements, in the month that they signed the loan or a lease. However, this is not accurate because the income statement should show the financial performance of a month using revenue, cost of goods sold and expenses in that same month. Loans and leases are going to affect the business overall, and in several time periods therefore it should go on the balance sheet. The balance sheet tells the overall financial position of the business using assets, liabilities and equity. Leases and loans are considered assets or liabilities which is why they shoot appear on the balance sheet

The next thing an entrepreneur should learn is that loans should be considered assets and leases should be considered liabilities so that they end up with the correct cash flow represented on their balance sheet. By understanding how to do the accounting for loans and leases, entrepreneurs can end up with accurate balance sheets that will help them understand their overall financial position of the business, and whether they can make fiscal decisions like running payroll, or paying bills. By not being able to consult accurate financial statements in order to make this decision can negatively impact the business. Therefore, by learning how to do this, entrepreneurs can learn how to be strategic and grow their business.

Edmonton Bookkeeping | Typical Queries About Accounting For Capital Leases

It does not have to be very difficult for entrepreneurs to learn how to do the accounting for loans and capital leases say Edmonton bookkeeping. However, business owners do not know what they do not know when they first start their own business, and there is a lot that they do not understand. Therefore, it is important that they understand everything about how to read and accounts on their financial statements so that they can learn how to use that information to make better economic decisions in their business. An important aspect of learning how to read the financial statements is understanding how loans and leases appear on their financial statements.

One of the first things that business owners should understand, is that loans are considered an asset to the business because an entrepreneur is going to end up with an asset at the end of the term. Edmonton bookkeeping says leases, on the other hand, are liabilities because it ends up with an entrepreneur continually paying money, and not building the equity of their business in any way. Business owners can consider the rent of their office space as an example of a lease that is a liability. While it is great that they have a place for their office, they are not going to own that place at the end of their lease. These leases are called operating leases.

There is a difference however between an operating lease and a capital lease. Capital leases are actually legally structured like a loan says Edmonton bookkeeping. The reason why, is because the goal of a capital lease is for an entrepreneur to own the assets at the end of the term. Therefore, entrepreneurs should be aware of the term of the lease that their signing. Does that lease have a discount by out option at the end? For example, if an entrepreneur has the option to buy an asset at the end, Elise, for one dollar, that is an indication that it is a capital lease.

Another way that an entrepreneur can tell that Elise is actually a capital lease is if the term of the lease is for longer than 75% of the assets’ useful lifespan. An entrepreneur should be aware of how long that asset is going to be useful for, and if the lease term is for almost the entire length of that life, that is indicative of a capital lease.

Therefore, when entrepreneurs are able to understand the difference between loans, capital leases, and operating leases, they will be able to enter the accounting information inaccurately, so that they can end up with accurate and up-to-date financial statements. When they end up with financial statements that are accurate, and they have the ability to read them, entrepreneurs will be better able to make more informed financial decisions in their business that can help them grow their company.