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Edmonton CPA | Answering common questions about financial statements
if entrepreneurs are struggling in business, Edmonton CPA recommends that they learn how to understand all of the financial statements in their business including their balance sheet, income statement and statement of retained earnings. However, many entrepreneurs try to do this, do not know the best way to go about doing it. Therefore they struggle and fail, or they abandon the task because they do not of the best way to do it. Therefore, understanding the most holy asked questions that accountants get when it comes to reading and understanding their financial statements can be very beneficial.
One problem that entrepreneurs often have, is they do not know what order they should review their financial statements in. They think that they can simply read their income statement first or their income statement only and be able to make informed decisions. Therefore, one of the first questions that Edmonton CPA gets on a regular basis is why should entrepreneurs create the balance sheet before the statement? The reason why it is important to the balance sheet first is a several part question. First of all, mistakes are more easily discovered on the balance sheet then on the income statement. By looking at the balance sheet first, entrepreneurs will be able to discover and correct mistakes so that they do not carry into the income statement. If an entrepreneur is not catching these mistakes first, it might look at their income statement and bank the wrong financial decision.
The second reason why it is important to read the balance sheet for, is because the balance sheet shows the overall financial health of the business whereas the income statement shows the profitability of a certain timeframe. No matter how profitable or not a specific time period is, that does not necessarily mean the business overall is that profitable or not. Therefore, entrepreneurs read the balance sheet and understand how the business is doing, before looking at how profitable specific times were in the business.
The third question that entrepreneurs often have when it comes to understanding the balance sheets, is what information is on the balance sheet. Since they have been told by Edmonton CPA that it should be the first thing that they understand and read, entrepreneurs want to know why. They should understand that the information will be organized with assets at the top, liabilities in the middle and equity at the bottom. Also, business owners should keep in mind that if they add up the liability and equity in the business it should equal the assets. So why they call it a balance sheet, because it should balance.
When entrepreneurs are more familiar with the balance sheet, the income statement starts making a lot more sense. However, entrepreneurs should be comfortable not only with reading the balance sheet, but using that information to make informed financial decisions. Such as, looking at the asset section to see how much cash they have in their business and can they run payroll. We getting used to these small decisions early on in their business, is going to help an entrepreneur gain familiarity with reviewing their financial statements so that when they are much more successful, this is going to be an easier process.
Edmonton CPA | Answering common questions about financial statements
If entrepreneurs are trying to learn how to improve their business says Edmonton CPA they should learn how to read their financial statements. The reason why, is because they can make more informed decisions simply by looking at nation presented in the financial statements. However, this is confusing for a lot of business owners. In fact, Intuit did a survey of small business owners to understand how much knowledge they had about business finances. Out of all of the respondents, 80% or less than 70% on the test. This shows that many entrepreneurs struggle with understanding basic business finances. The more help they can get the better.
The first question that entrepreneurs often get is that information is on an income statement. The reason why this is the first question says Edmonton CPA, is because entrepreneurs are told that they should first read and understand the balance sheet first. Often, entrepreneurs can more easily read the income statement and use that in order to make their business decisions. However, this is a big mistake to help entrepreneurs understand why, they should understand what is on the income statement. This covers a specific timeframe, usually one month. Entrepreneurs are looking at it, Edmonton CPA recommends that they look at a six-month comparative statement because that will help them understand the information. Basically, the information included in this report is how much revenue is generated in this timeframe, and what expenses were incurred.
The next question that entrepreneurs often have further Edmonton CPA is what is the difference between a profit and loss, or sometimes called at P&L, and an income statement. Ultimately, this is a different name for the exact same report. Many accountants have learned to call it a income statement, and many accounting software like QuickBooks, QuickBooks online, Sage and zero refer to it as a profit and loss statement. Entrepreneurs should get used to understanding the two different names, especially if they are taking care of the bookkeeping themselves.
The next question that entrepreneurs often have for their Edmonton CPA is how many pages should each of the reports and financial statement be? Financial statements should be comprised of a balance sheet, an income statement and a statement obtained earnings. It may seem very overwhelming to ask entrepreneurs to learn how to read three statements. Fortunately for them, since all of the reports should be one page, it should not be as daunting as it sounds. In fact, the reason why each of them is limited to one page is to make it easy for entrepreneurs to look at, understand and utilize in their business decisions.
Demystifying financial statements is extremely important and can help entrepreneurs learn how to run their business a lot better. Not only can understanding the financial statements help entrepreneurs avoid making financial mistakes. But using the financial statements properly in a business can help entrepreneurs learn when to hire or lay staff off, when to purchase assets or how to save to purchase those assets, as well as understanding how effective their marketing activities are and if they should continuum, increased them or change them. All of these things are very important for entrepreneurs to understand and learn in order to run a successful business. Therefore, the sooner they can learn that, the better off their business is going to be.