Free consult & free copy of book

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

Contact Us


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 | What Are The Differences Between Leases And Loans

Many entrepreneurs are familiar with leases and loans in their business because financing is how they pay for a lot of their business says Edmonton bookkeeping. However, businesses do not just need to know what they are, but how to account for leases and loans in their accounting software properly. The reason why is because it can affect the accuracy of their financial statements, and their ability to understand the cash flow in their business. When they understand this, they will be able to use the information to make more informed economic decisions in their business that will allow them to not only avoid financial problems but be able to make strategic decisions that can help them grow and be successful.

One of the first things that entrepreneurs need to learn is leases and loans are accounted for differently. The reason why says Edmonton bookkeeping is because the goal of each is vastly different. The goal of the loan is for an entrepreneur to own and assets at the end of the term. A lease, on the other hand, has no goal of ownership at the end of the term. The option for an entrepreneur is to sign another lease or to walk away from the asset.

Because alone ends up with an entrepreneur owning an asset, it is considered and assets of the business, and should show up on the balance sheet as such leases, on the other hand, should be in the liability section of the balance sheet, because since an entrepreneur is not building the equity or ending up with an asset, there just going to continue paying that amount forever, it is considered a liability of the business. When entrepreneurs are able to understand that they need to be put in the balance sheets this way, they will be able to understand the cash flow in their business.

There is one lease that has the goal being ownership, even though it is not necessarily a foregone conclusion at the beginning of the term says Edmonton bookkeeping. If the lease is structured in a way that has of discounted buyout option at the end of the term, or if the lease term is for longer than 75% of the assets useful life, then that usually is going to end up with the entrepreneur keeping that assets at the end of the term, because the leasing company will not want it back since it is not useful. These leases are called capital leases and are actually legally structured like a loan. Therefore, entrepreneurs need to be able to identify capital lease, and then put it in the asset section of their balance sheet.

By understanding the differences between loans, capital leases and operating leases can help entrepreneurs end up with accurate financial statements in their business. They can then learn how to read the statements in order to understand if they can run payroll, pay bills or even pay themselves. If an entrepreneur would like to purchase an asset even, being able to understand how to read their financial statements can help them see if they have enough money in their business to do that, or if they need to come up with a plan on how to purchase it.

Edmonton Bookkeeping | What Are The Differences Between Leases And Loans

When entrepreneurs struggle with understanding their business finances says Edmonton bookkeeping, they end up being unable to make informed monetary decisions in their business and put their business at risk. Therefore, not only is it important for entrepreneurs to learn how to read their financial statements but if they can learn how to account for different aspects that need to be entered into these financial statements, they will be able to gain a deeper understanding of their financial situation, that can help them strategically grow their business as well as avoid making poor decisions.

One of the very first things that an entrepreneur should understand even before they obtain more loans are leases in their business, is how to read to their financial statements so that they can see what the profit of their business is. Edmonton bookkeeping says that the reason why this is important because if an entrepreneur does not have the profit in their business to make a loan or lease payment, they are going to run a negative balance in their business. A business might be able to withstand this occasionally, but if an entrepreneur does not have the profit in their business, and they continue to run a negative balance, they will run their business out of money and force their business to close. 29% of all failed entrepreneurs say running out of money was the reason why their business failed, so it is important for entrepreneurs to be aware of so that they can avoid it.

The next thing that entrepreneurs need to learn when they are accounting for loans in leases in their financial statements, is that they should go on the balance sheet and not the income statement. Many entrepreneurs believe that leases and loans should be entered into the income statements in the month that they were signed. However, this is not true says Edmonton bookkeeping. The reason why is because the income statement is to detail the financial performance of the business in a specific month using the revenue, cost of goods sold and the expenses of the business and that particular month. Since the loans or the leases, the entrepreneur has signed is going to benefit the business for longer than that time. And also need to be paid for longer than that time period, it should go on the balance sheet.

Not only is it important that entrepreneur understands that the leases and loans get put into the balance sheet, but it is also important that an entrepreneur understands that they need to go into their own separate accounts on the balance sheet. That entrepreneur should not have one loan account called all loans, but have separate accounts on the balance sheet for every single loan and lease that they have without any co-mingling know matter how much sense it might make to a business owner. By learning this, entrepreneurs can ensure that they can see exactly what loans and leases they have in their business at a glance, and how much is outstanding on those loans.

Edmonton bookkeeping says that when entrepreneurs understand this, they can end up understanding their financial statements to a deeper level that can help them make better economic decisions in their business that can help them be strategic about their growth, plan their spending, and be successful.