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

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Edmonton CPA | understanding balance sheets and income statements

Even though many entrepreneurs do not know how to read financial statements when they start their business says Edmonton CPA they should learn quickly. The reason why, is because the sooner they can learn how to read and utilize the financial statements in their business, the better quality financial decisions they will be able to make. Not only will this help them avoid making financial decisions that can harm them. But it can also help them make financial decisions that can help them grow their business as well.

The first thing that entrepreneurs should understand, is that when they hear their Edmonton CPA say financial statements, they should understand that it refers to three different reports. These three reports are called the balance sheets, the statement of retained earnings and their income statement. Many entrepreneurs get confused and wonder where the profit and loss statement comes into this equation. However, it is important to note that while most Canadians say income statement, most software companies say profit and loss but it is the same report. Therefore, entrepreneurs should be able to understand that when their accounting software says profit and loss or p and L, they do not have to panic about knowing what report that is.

The second thing that entrepreneurs should keep in mind, is that these ‘s should be limited to one page each. This is done on purpose says Edmonton CPA, because they need to be able to easily be read and understood. Especially because how often an entrepreneur should be using these reports in order to make financial decisions, the easier they are to read, the greater chance an entrepreneur will have at actually reading them every single time.

The first financial statements that an entrepreneur should focus on learning is the balance sheet. The reason why, is because this gives a great overview of the overall financial health of the business. Edmonton CPA for this means it lists all of the assets currently in the business, over liabilities currently in the business, and all of the equity. Some entrepreneurs make the mistake of believing that they can find out how much money they have in their business by checking their bank statement. The reason why this does not work, is because it does not take into consideration all of the disbursements that are scheduled to come out of the bank, nor does it take into consideration all of the checks that have not yet been cashed. Therefore, if entrepreneurs using their bank balance in order to make financial decisions they are inevitably making errors. By learning how to read the balance sheet first, entrepreneurs will be able to understand how much money they have in their business to work with.

Once an entrepreneur learns how to read their balance sheet, they can start understanding when they can disburse money, and when they need to engage in revenue-generating activities or Accounts Receivable. This is the first step to helping entrepreneurs not only avoiding mistakes that could cost them their business. It can also help them learn the skills that they need to use that information to grow their business as well.

Edmonton CPA | understanding balance sheets and income statements

Even though entrepreneurs may not have the skills when they start their business of understanding their financial statements says Edmonton CPA. However, it is one skill that they should learn early on so that they can make informed financial decisions in their business. In fact, the company behind accounting software QuickBooks surveyed small business owners in order to test them on their knowledge of business finances. Out of all of the respondents, 82% of everyone scored less than 70% on the test. This means a significant amount of entrepreneurs are missing some very important knowledge about their business finances. The sooner they can gain that knowledge the better.

Once an entrepreneur has learned that a financial statement prefer to three different reports which is the balance sheet, the statement of retained earnings and the income statement, they can start focusing on each of the individual reports. Once they have mastered learning about the balance sheet and using that in their business, the next report that entrepreneurs should focus on according to Edmonton CPA is the income statement.

The income statement is going to show an entrepreneur the profitability of a specific timeframe. Typically a month, which is why it is important that entrepreneurs learn how to review their income statement on a six-month comparative statement. The reason why so important, is so that entrepreneurs are able to see several months at a time, that will allow them to gain more information. Such as being able to see trends. Edmonton CPA says are the profitability of each month going up? Or are they going down? Is there one month that is extremely higher extremely low? This could be due to an unusual circumstance happening in the business, or because of the mistake.

When an entrepreneur looks at their income statement, they should expect to see revenue at the top. Underneath that, all of the direct cost of sales. These direct costs of sales are specifically the cost of the subcontractors, employees that are needed to make that product or service, and the materials. These are all of the costs that an entrepreneur will incur through a direct result of selling a product. Underneath that schism ten CPA will have a total of the gross profit. This is revenue minus direct cost of sales. Underneath that, will list all of the general expenses of the business. Entrepreneurs need to understand that this is sometimes the largest expenses they have in the business, and are all of the expenses that a business will incur even if they sell a product or not. Underneath that, will have an that income or net loss.

By understanding this report, can help business owners understand what was happening in their business at the time that may have impacted how profitable that month is or not. By looking at this is the same time as their balance sheet can help entrepreneurs gain insights as to how to grow their business, but they need to do to avoid seeing a negative number on their income statement, and generally be more proactive about the finances in their business. The sooner entrepreneurs can do this says Edmonton CPA, the more prepared they will be at being able to proactively grow their business.