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

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If business owners think that other expenses and income of the corporation belongs to their income statement along with the revenue and expenses of their business, they might be putting their business in Jeopardy says accounting Outsourcing. The reason why is while other income and expenses do belong on the income statement, they need to be separated out so that business owners can understand not only the profitability of their business but what the expenses are and what the revenue is. By putting the income and expenses of the corporation in the income statement along with the business income and expenses, they’re making it very difficult to tell how the business is doing, or if they need to minimize expenses or increase Revenue. In order for a business owner to make informed financial decisions, they need to be looking at Accurate income statements.

And while the other expenses and income definitely belong to the income statement, a business owner needs to understand where they do belong. Accounting Outsourcing says understanding how an income statement is organized is an important part of learning where to put the other income and expenses. The income statement is organized but having the revenue of the Core Business at the top. Everything that they make from selling the products and services of the business goes here. Below that is the direct cost of sale, which includes the materials and supplies that are needed to be bought in order to produce their product or service, as well as the cost of the workers to do the work. Whether these are employees or independent contractors.

Underneath the revenue and the direct cost of sale, a business owner will see the gross margin, which is the revenue minus the direct cost of sale. After that, accounting Outsourcing says will be the overhead expenses and these include the administrative wages, the rent or mortgage of the office space, Business Supplies, utility bills, phone and internet, and even Bank fees. These are all of the expenses that a business will incur before they start selling products.

Underneath the overhead expenses will be the net income from operations. Accounting Outsourcing says this is the most important thing that a business owner is going to be looking at on their income statement. It’s going to tell a business owner how much money they have leftover after the direct cost of sale and the overhead expenses. However, it’s the category that comes next that a business owner truly needs to understand.

The category after that is the other income and expenses and should be where people are putting income and expenses that the corporation incurred, that don’t belong with the core business. examples will be the business owners’ salary, property taxes on the corporation’s rental property, the profit, and loss from there Investments. My understanding of what goes in the revenue and expenses of the business and what goes in the income and expenses of the corporation can help ensure that business owners end up with accurate income statements.

Accounting Outsourcing | Do Other Expenses and Income Belong to the Income Statement

When business owners find out that they should not be commingling the income and expenses of the corporation with the expenses and income of the business, they end up with a lot of questions says accounting Outsourcing. They often wonder if it is necessary to have the corporate income and expenses on the income statements of the business at all. And ultimately, the answer to that question is yes, the corporation and the business are essentially the same entity. And while they belong on the same income statement, they don’t belong in the same location on the income statement. A business owner needs to be able to look at the income and expenses of their Core Business and understand if they need to increase Revenue if they need to minimize expenses, and what the profitability of the business is so that they can make plans to increase the size of their business and grow. If the expenses and income are commingled, business owners will not have an accurate picture of how well the business itself is doing.

An example of this is if an entrepreneur ends up putting all of the income they get from their rental property into their business. Perhaps they’re going to generate $100,000 of income from their rental property. If this is commingled with the profit of the business, it might look like it is very effortless to increase the profitability of their business. However, this might not be true. And if an entrepreneur ends up selling their rental property, the profitability of their business will look like it took a nosedive which is also not true. By keeping the income and expenses for the corporation separate, business owners can end up with a more accurate picture of how well off their business is doing.

This is incredibly important if business owners are going to end up getting financing for their business. Accounting Outsourcing says that this financing might be for leasehold improvements of their space, it might be for assets that business owners need to increase their revenue, or it could even be to purchase a building for the business. The bank officers and financiers are going to look at the income statement in order to determine the profitability of the business. If an entrepreneur has their salary listed in the expenses of the business, they may be denied financing when it should be approved, because a business owner’s salary shouldn’t be included in the expense section of the business.

When business owners understand why the two must be separated, they will be much more successful in doing their own bookkeeping or telling their accounting Outsourcing company when it is a corporate expense so that they can end up with the most accurate income statement possible. The sooner business owners are able to do this, the more income statements that they will have that are accurate, which will be needed to get the financing they Are looking for in order to help them grow their business.