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Accounting Outsourcing | Why Entrepreneurs Should Not Commingle Corporate and Business Expenses

The reason why business owners should keep corporate and business expense separate is so that they will be able to get a better understanding of their income statement says accounting Outsourcing. If business owners commingled both corporate and business expenses, they will have a much more difficult time understanding the profitability of their business. However, many business owners struggle with understanding why corporate and business expenses should not commingle. And even if they understood that they shouldn’t, they might not understand how an income statement is organized, and how to keep them separated.

Business owners should understand that’s the reason why they’re Corporation expenses should not commingle with their business expenses, is because the business expenses only should be listing either the direct cost of sales or their overhead expenses. Some examples of corporate expenses that should not be listed here would be the business owners’ salary, property taxes from buildings owned by the corporation, losses associated with Investments made by the corporation, and condo fees from their rental building says accounting Outsourcing. These are legitimate expenses of the corporation, but they should not be listed under the expenses of the business.

The place that business owners can put the expenses of their corporation is at the very bottom of the income statement, in a category listed as other income and expenses. All expenses that are not specific to the cost of goods sold, or the overhead expenses can be put here. Many business owners think that their own salary is something that should be put into the expenses of their business but this is not true says accounting Outsourcing. quite often, business owners would typically get paid in dividends, which means the business needed to turn a profit in order to have those dividends. But an accountant may make a decision to pay a business owner with some salary instead of dividends, because of tax purposes. Since they are entitled to dividends, the business owners of salary should not be put into the expenses of the business.

If business owners end up having their salary in with the business expenses, it can make it difficult to get financing as well as difficult to sell the business accounting Outsourcing. Financiers and potential buyers of the business will see that there’s not a lot of profit in the business, which is not true if business owners took out their salary. Therefore, in order to ensure that their business looks as profitable as it is so that they can get financing, so as well as make informed business decisions, business owners should understand where to put corporate expenses on their income statement. The sooner business owners can do this, the sooner they’re going to have income statements that accurately reflect the profitability of their business, and allowing business owners to increase their ability to make informed financial decisions in their business. With how often business owners will have to make informed financial decisions, having correct financial statements is incredibly important to the longevity of the business.

Accounting Outsourcing | Why Entrepreneurs Should Not Commingle Corporate and Business Expenses

Many entrepreneurs may not realize the importance of keeping their corporate expenses separate from their business expenses says accounting Outsourcing. However, many business owners often misunderstand business finances, and that puts their business at risk. In order to discover how financially literate business owners were, the company that makes QuickBooks, Intuit did a survey of these small business owners. They were asked a bunch of financial literacy questions such as what is a balance sheet, what is an accrual, and how to increase the cash flow of a business. Intuit discovered that 82% of all of the business owners who responded scored less than 70% on this quiz. That shows how few business owners truly have a complete understanding of their business finances.

In order to help ensure that business owners are understanding their income statement, they should understand how it’s organized, and what information goes where says accounting Outsourcing. On top of the income statements, they will have the revenue of the business. This is all of the revenue that is generated by selling their products and services. Many business owners might think that if they sell an asset of the business like a vehicle or a piece of equipment, that the profits from that sale should go into the revenue and this is not true. Since they don’t usually create the revenue of their business by selling assets, this doesn’t belong here.

Underneath the revenue is going to be the direct cost of sales, which are specifically the expenses that a business owner will incur through making their products or delivering their service. This includes supplies and materials as well as the labor to make them. Accounting Outsourcing says that the labor can be employees of the company, or they could be independent contractors that the company hired.

When the direct cost of sales is subtracted from the revenue, the business owner will get the gross margins which are next. After that is all of the overhead expenses of the business. These expenses are all of the expenses that a business owner will pay whether they sell any products or services in their business or not says accounting Outsourcing. Therefore, the expenses of the corporation do not belong here. Examples of expenses that do belong there are administrative staff salaries, rent or mortgage of the office space, office supplies, utility bills including phone and internet, and Bank charges.

When all of the expenses the overhead, as well as the direct cost of sales, are subtracted from the revenue, then the business owners are going to get the net income from operations. This is the number that business owners are going to look at to determine the profitability of their business and if they need to increase their revenue or cut their expenses. Accounting Outsourcing says that underneath this is a section called other income and expenses and is where a business owner will need to put all of the expenses from their corporation.