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In order to ensure that they have the right information counted as an asset in their interim financial statements, entrepreneurs should learn what the definition of the fixed asset is when it comes to their business. Outsourced CFO says a very simple definition is any purchase that an entrepreneur has made in their business where the purchase has a useful economic benefit longer than one year in their business. A great example of a fixed asset is major equipment in a business or computers. These will serve a useful purpose for the business for many years.
On the other hand, expenses are purchases that an entrepreneur makes that will not have a lasting benefits in the business past the point of purchase. Examples of an expense in a business is office supplies. Once those supplies are used, there is no additional benefit to the business, the entrepreneur just has to go and purchase or of them.
When it comes to ensuring assets are booked onto the interim financial statements correctly, is owners may find it is effective to avoid putting on any assets under a thousand dollars onto their financial statements. Outsourced CFO says technically assets under thousand dollars can be calculated, but it may not be worth the time involved to enter them all in and then appreciate the value every single year. That time can often be better spent increasing the revenue of the business or achieving the strategic priorities of the Corporation.
Another benefit entrepreneurs can have two calculating assets that are only over a thousand dollars, is that if they see on their interim financial statements that an asset has been counted under thousand dollars they can be able to tell that that is obviously a mistake. A typical culprit would be someone making a purchase, and entering it into the asset account. For example, someone purchasing an office printer for five hundred dollars. Ordinarily, this would fit the description of an asset which is why it is understandable if it was entered into the asset account incorrectly. However, it is under thousand dollars and so it should not be counted there. By using this rule, entrepreneurs can ensure they are fixing errors as soon as they occur, guaranteeing the accuracy of the interim financial statements that they are going to use in their business to make accurate and positive financial decisions.
By learning some simple accounting terms, and how that looks on their balance sheets and income statements, entrepreneurs can end up with accurate reports that can help them make positive financial decisions in their business.
Industry Canada says that half of all Canadian entrepreneurs end up failing in their business within five years, outsourced CFO says entrepreneurs can avoid that fate if they learn some basic accounting terms and how to read interim financial statements.
One of the ways that entrepreneurs should learn to keep their interim financial statements accurate, is by understanding how they are assets look on their income statements and balance sheets. The first thing that entrepreneurs should understand is when they purchase a fixed asset for their business, it should not immediately show up on the income statements of the business. The reason for this says outsourced CFO, is because if the purchase shows up there, it would negatively impact the profits of the business in that month. Since the purchase is not negatively impacting profit because it is in asset purchase that is going to benefit the business over several years, it should instead bypass the income statement and be counted on the balance sheet. This way the purchase can be accounted for, will not negatively impact the business.
However, entrepreneurs should understand that it is not going to stay absent from the income statement forever. Outsourced CFO says that when entrepreneurs get there fiscal year end, and are working on their year-end statements, they will be depreciating all of the assets of their business. Any assets that were purchased in the year, will get depreciated, and the amount that it depreciates will be put onto the income statement. This will happen each year until the fixed asset is sold, or no longer has a useful life of over one year and it will drop off the records.
Something else that entrepreneurs should keep in mind when purchasing fixed assets in their business, is if they set up a subaccounts when they make those purchases, it can help them stay organized and have the maximum amount of information possible on those assets should they ever decide to sell them, or even sell their business and want to have an accurate record of all of their assets in the business. Outsourced CFO says that entrepreneurs should consider vehicles one of the most important assets to keep information on because they are most likely to be sold, and to be sold for a significant sum of money.
When entrepreneurs are depreciating their assets, they are going to end up with what is called that the book value of that asset. Outsourced CFO says that this is calculated by taking the cost of the assets, minus the amount that it has depreciated since it was purchased. When an entrepreneur goes to sell that asset, even though it will be calculated at book value, they are going to be selling it at fair market value. The fair market value is calculated by whatever people will pay for that asset. While the book value can be a great predictor of the fair market value it is not always. Entrepreneurs should be prepared to get a lot more or a lot less then book value of the asset.
