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Outsourced CFO | Best Practices When Classifying Assets
There are several things that entrepreneurs should keep in mind when purchasing anything in their business says outsourced CFO. Because how they classify those purchases can greatly impact their financial statements. The differences between asset purchases and expenses and how they are classified have a huge impact on the accuracy of their interim financial statements. If entrepreneurs are looking to use their interim financial statements in order to make important financial decisions, they should ensure they understand the difference between an asset and an expense and careful and book those correctly in their income statements.
The first thing that entrepreneurs should understand when learning how to classify assets, is understand the definition of what an asset is in their business says outsourced CFO. Entrepreneurs should classify anything that they purchase that has a useful economic benefit over one year as an asset in their business. Great examples of the assets in business are vehicles, computers, and real estate. Major equipment can also be considered assets, such as if a doctor purchased an x-ray machine for their business, or a clothing manufacturer purchased a large, industrial sewing machine entrepreneurs should also understand that leaseholder improvements are also considered fixed assets, because they will benefit the business for longer than a year. For example if an entrepreneur a new roof on their building, they are going to be able to use that building for a long period of time with that roof, therefore it is considered an asset.
Great rule of thumb that entrepreneurs should use in order to figure out what assets they should include on their income statement is if it it has a value greater than the thousand dollars. Outsourced CFO says technically assets under thousand dollars can be counted on the financial statements of the business and be correct, however this speaks more to the best use of an entrepreneurís time. Even if there is many assets under thousand dollars, including them in the assets of the business is not going to greatly impact the entrepreneurs bottom line, and once there in the income statement, an entrepreneur is going to have to spend time every year depreciating those assets. In order to ensure the best use of time, entrepreneurs should use the guideline of not counting anything under thousand dollars on their financial statements.
Because of this guideline of having assets only worth over a thousand dollars put into their income statement, entrepreneurs should be looking at their income statement to see if any small changes have been added into the asset account since they last checked. If they see this, not only is it a likely mistake, but it is a mistake of usually someone putting an expense into the asset account. For example, an entrepreneur may have purchased printer for five hundred dollars. While this technically can be considered an asset, since it is not worth a thousand dollars or more, an entrepreneur should leave it out. By ensuring the accuracy of the information in the asset accounts, entrepreneurs can ensure the integrity of their interim financial statements.
Outsourced Cfo | Best Practices When Classifying Assets
Many entrepreneurs struggle to understand basic financial literacy says outsourced CFO. As a result, they end up with an accurate interim financial statements. If they use in accurate statements in order to make financial decisions in their business, they could end up making poor financial decisions that could negatively impact their business. One of the ways that entrepreneurs can ensure they keep their financial statement is accurate as possible, is watch how they classify assets and expenses in their business to ensure that they are accounted for properly in order to ensure the accuracy of their interim financial statements.
One of the first things that entrepreneurs should understand when they purchase assets is that the expense should not show on the income statement right away. The reason for this is because when assets get counted and income statement right away, it significantly and negatively impacts the finances of that month. Just because an entrepreneur has made an asset purchase and that month does not mean that the business did not profit in that same month. Therefore, in order to ensure that it is accounted for in the income statements, but without negatively impacting the finances, but happens is the asset bypasses the income statement completely at this point in his put directly onto the balance sheet of the business. Outsourced CFO says that when that asset is depreciated in the year end, it will then appear on the income statement for the total amount that it has depreciated. This way, the balances maintained between the expenses to the income of the business without an entrepreneur taking a massive hit to the finances in the month that they have made that purchase.
In order for an entrepreneur to be organized when purchasing assets in their business, outsourced CFO recommends business owners set up subaccounts for their assets. This is extremely beneficial if an entrepreneur is purchasing many assets in their business, or if they are likely going to resell those assets, or sell their business. These subaccounts can help entrepreneurs ensure that all the assets and all of the information about those assets are accounted for. If these assets are going to have a higher resell value, it is even more important that entrepreneur has all the information about them intact. A good example of assets that likely have a high resale value and should have a subaccounts set up in the financial statement are vehicles. Particularly businesses that purchase a lot of vehicles. Contractors and rental vehicle companies are two examples of businesses that purchase a lot of vehicles, and sell them once the cost of maintaining them increases to a certain point.
By understanding how these assets and expenses it calculated on the income statements and balance sheets of the business, can help entrepreneurs ensure that not only are there interim financial statements accurate, but that they are accounting for their assets properly.