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Accounting Outsourcing | Understanding Where Corporate Income and Expenses Get Recorded

 

If business owners don’t understand how to correctly organize or keep track of all of the expenses and income in their business incorporation, they could be making vital errors says accounting Outsourcing. The reason why is because business owners need to keep track of the expenses and revenue of their Core Business separately from their corporation. In order to be able to use the income statements to make informed financial decisions, is its owners need to understand where everything needs to go on the income statement so that they can read it for accurate information.

When an extremely important reason, is that if the income of the corporation was added to the income of the Core Business, a business owner would not know what the profitability of their Core Business is. For example, business owners might have an investment in their corporation, which generates huge profits. If this is commingled alongside the profit of the business, it might make the business look like it is ready to grow, add employees, or even scale up to a new location that’s larger. However, since these expenses are typically one-off, and the profit is kept by the business owner, putting it in the profit of the business is not accurate. Accounting Outsourcing says that if business owners end up putting the profits of their corporation in the revenue of the business, they might end upscaling their business up, or adding employees that they can’t actually afford. This will lead to the business running out of money and ultimately failing.

Another reason why business owners should not put the income and expenses of their corporation alongside their Core Business is that it can also make the business look like it is not profiting at all, and even failing. An example of this is if a business owner has a rental property in their corporation, and it is a condo, maybe that business owner will get a special assessment of $20,000 that they have to pay. They are going to add that the expenses of their Core Business, and perhaps make their business look like they lost $20,000. To a business that is actually doing well, and might need to grow to a new location, or add staff, this can cause the business owner to stop those plans, and actually stole the growth of their business. They might need to purchase an asset in order to continue growing, and by putting that expensive the corporation in the income statements alongside their business, we’ll make it look like they can’t afford that asset and stall the growth of their business again.

Goodness knows there’s a need to understand that while the expenses and income of the corporation do belong on the income statement, where it belongs is very important. Underneath the revenue and expenses of the business as a section called other income and expenses says accounting Outsourcing. By putting all of the income and expenses of the corporation there, business owners can end up understanding the profitability of their business, so that they can make informed financial decisions much easier.

Accounting Outsourcing | Understanding Where Corporate Income and Expenses Get Recorded

Business owners need to understand that they need to learn very quickly in their business particularly when it comes to their business finances says accounting Outsourcing. In fact, the company that makes QuickBooks software, Intuit did a survey of small business owners and entrepreneurs to understand their knowledge of business finances. Participants were asked questions about what an accrual is, what a balance sheet is, and how to increase the cash flow in their business. 82% of the small business owners that took the survey scored less than 70%. This shows how little many entrepreneurs know about business finances. And this more often than not puts business owners at risk of making poor decisions financially that can end up costing them their business.

In order to understand where everything should go on an income statement and how to read it, business owners should understand how the income statement is organized as accounting Outsourcing. The first thing that business owners will notice is that the revenue of the business appears at the top of the income statement. The only things that should be listed here are the revenue that is generated by selling the products or services of the business. Underneath the revenue should be the direct cost of sales, or also known as the cost of goods sold or cogs. These are specifically the supplies, materials and labor associated with generating those products or services.

Underneath the cogs will be the gross margin, and this is calculated by taking the revenue of the Core Business and subtracting the direct cost of sales. Underneath the gross margin that is the overhead expenses, and these are the largest expenses that a business owner will have in their business. These are all the costs associated with opening the doors to their business, and what an entrepreneur will have to pay before selling a single product or service. Typically, business owners should expect to have expenses such as office supplies, utility bills, phone and internet, Bank charges, rent or mortgage of the office space, and all of the salary of the administrative staff if there is any.

By subtracting the direct cost of sales and the overhead expenses from the revenue, accounting Outsourcing says a business owner will end up with the net income from operations. This is one of the most important calculations on the income statement and is going to help an entrepreneur understand what the profitability of their business is. This is going to be what allows a business owner to understand if they can pay bills, hire staff, or if they need to cut expenses or increase their revenue.

Underneath the net income from operations says accounting Outsourcing is the other income and expenses. Accounting Outsourcing says all other income and expenses should be listed here. This might be from the corporation itself, such as the profit and loss from an investment, B income and expenses of any rental properties owned by the corporation, and where business owners can put the sale of assets if they’ve generated an income.

When Mrs. owners understand how to and reads their income statements, they will be a lot more prepared to make more informed financial decisions in their business. Since business owners need to pay their staff every 2 weeks, a business owner is going to need to look at this income statement at least every other week, if not more frequently than that. Therefore the more accurate and up-to-date it is going to be, the better.