In today’s dynamic business landscape, leasing has become a common phenomenon. Many organizations have already acquired fixed assets, such as machinery, plant, and equipment, on lease.
After all, financing assets worth millions of dollars in cash is practically impossible for small business owners, and that’s where the option of leasing comes in handy. Instead of paying the entire amount upfront, they can break the cost into monthly rentals.
While leasing an asset sounds feasible, most entrepreneurs struggle with its accounting treatment and compliance. It requires the company to follow international accounting standards and maintain books accordingly.
The standard defines a lease as a contract to transfer the right to use an asset to the lessee for a certain period in exchange for consideration.
Therefore, every company must draft a contract, define the right to use an asset, and record rental income. Sounds complicated, no?
Surprisingly, tech-savvy lease accounting software has made this easy. It handles all complexities related to leasing while recording all accounting transactions. It also delivers end-to-end solutions for lease portfolios to ensure compliance and profitability. If you haven’t integrated it yet, let us help you understand why it is essential for your company.
Here we have listed six benefits of lease accounting below.
1. Ensures Compliance with Lease Standard
With the new ASC 842 and IFRS 16 lease accounting standards, companies must report the right of use (ROU) assets and liabilities in financial statements. The purpose behind this is to improve disclosure and visibility into leasing obligations.
Manual record keeping can be challenging, so leasing software ensures compliance with these leasing standards.
Further, it can help in switching standards. If you are moving from IFRS to GASB, the software will automatically check the accurate GASB 87 effective date to adjust incoming and outgoing transactions accordingly.
This software also has a built-in classification system that identifies whether you are a lessee or lessor.
Based on that, it records rental income and expenses, ensuring correct financial entries. Further, lease accounting software identifies which leases aren’t in the jurisdiction, eliminating the likelihood of errors.
2. Assists with Lease Renewals
Have you ever missed a date to get your lease renewed? If so, you would know much paperwork and money it takes to lease back an asset again. Similarly, overpayments, missed payments, and late fees are equally daunting for business owners.
If you wish to stay on top of critical dates, lease accounting software can be super helpful. It has a built-in lease query system that allows you to enter important dates relevant to your leases. The system sends automated alerts five days before the actual date, keeping you well-informed.
Besides this, the software also displays assets for which you shouldn’t renew the lease. These assets are not being used actively or have zero monthly production. In addition, the software also identifies contracts that no longer provide economic benefit.
Perhaps, the rentals are higher than the return on investments. As accountants are already occupied with routine operations, lease accounting software can be helpful for your business.
3. Performs Financial Audits
Typically, every department maintains its record of documents and files. Hence, the payment division, finance, and accounts will have different files for the same lease agreements. Doesn’t this make it challenging to filter out information during the audit season?
You can utilize lease accounting software to save yourself from this trouble. The software’s functionalities can narrow your search and get the necessary data within seconds.
Moreover, lease accounting software has a cloud-based centralized database. That means all team members can store their data on one forum. It will give accountants and auditors quick access to all lease-related contracts.
In addition, the cloud-based system will allow you to generate reports, speeding up the auditing process. Above all, you can give auditors ‘read only’ access to the software. It will enable you to scrutinize all documents without disturbing you.
4. Improves Budgeting & Forecasting
The benefits of lease accounting software go beyond record-keeping. It gives access to real-time data, meaning; you have complete visibility of business spending and costs. As a result, you can leverage lease management software to create accurate budget forecasts. It will provide accurate financial information, helping you with the decision-making process.
With access to real-time data, you will also be better positioned to make leasing decisions as an entrepreneur. You would know how much liability stands and if there is room for more debt.
Likewise, you can determine if the income statement can bear more rentals without impacting business profitability. Without this information, companies cannot make informed decisions that can lead to long-lasting financial consequences.
5. Fosters Departmental Collaboration
Do you use MS Excel to maintain lease agreements? If so, you are way behind modern times. Maintaining these manual records takes time and leads to errors.
Moreover, since multiple departments handle lease contracts, keeping everyone on the same page can be challenging.
Lease accounting software allows all employees to access a centralized system, enabling them to work collectively. It also allows them to create an accessible chart of accounts that adhere to standard processes.
Having all information in one place will enable employees to improve interdepartmental processes and workflows. Besides this, the software will inform the team about upcoming deadlines, allowing them to keep track of all lease payments.
6. Enhances Vendor Management
As business starts to grow, managing relationships with stakeholders becomes challenging. It becomes arduous to keep a record of every vendor, order volume, and payment schedule. If you are facing the pressure to manage increasing vendors, leverage your lease accounting software.
It can quickly track and manage all business contracts by providing a complete view of business transactions with different vendors.
Furthermore, you can download reports and insights from the software to determine which vendor offers the best prices. It will help you negotiate better rates with other suppliers.
Improved vendor management will allow you to increase leasing and purchasing power, helping you excel in the market.
Today’s fast-paced finance world demands high-tech solutions like lease accounting software. It makes it easy for entrepreneurs to acquire assets and maintain accurate records. It also saves accountants from many headaches of complying with accounting standards.
As a result, you can save costs, resources, and time spent on cumbersome tasks. Most importantly, it will increase accuracy, giving an accurate and fair picture of the company’s financials.