Most 5 star CPA Google reviews in Canada
Helping Canadian businesses beat the odds!
Many entrepreneurs are unsure what an asset is versus what an expense is and how to tell a difference between the two on their financial statements. Outsourced CFO says that a simple definition of the fixed asset is anything that an entrepreneur purchase that has a useful economic benefit of over one year. A great example of an asset is a vehicle that an entrepreneur buys for their business. After the date of purchase, it is going to be providing an entrepreneur with a benefit for many years. Anything that is an asset should be added into the asset account on the financial statements. An expense on the other hand is something that an entrepreneur purchases in their business, but does not have a useful life outside of that purchase. Office supplies are a great example of this, they are very needed in the business, but they are not going to provide a lasting benefit to the business.
helpful tip that entrepreneurs can use to help them account for their assets efficiently, is to only track the assets that are larger than a thousand dollars. The reason for this is because it takes a lot of time to manage, not only for entrepreneurs to enter in all of the smaller assets into their business, but then to spend time depreciating each of those assets every year. Instead, entrepreneurs can use that threshold to ensure that they are not spending a lot of time on something that is not going to impact their bottom line very much.
A great benefit of ensuring that there only accounting for assets over thousand dollars, is it helps entrepreneurs and see mistakes in their interim financial statement. If they see smaller amounts added into their asset account, not only is that an obvious mistake, but entrepreneurs can understand what that mistake typically is. It is usually someone playing in expense into the asset account of the business. For example, someone might have purchased an office printer for four hundred dollars and it fits the description of an asset, so they think it belongs in the asset account, but using the threshold of anything under thousand dollars is not counted can help entrepreneurs take these incorrectly placed expenses and put them back where they belong.
By understanding what an asset versus an expense is, and how to enter them into the financial statements of the business can help entrepreneurs keep accurate record and therefore more correct interim financial statements, but also help them catch mistake to ensure the accuracy of those financial statements.
Many entrepreneurs struggle when it comes to cash flow in their business says outsourced CFO. Industry Canada says that half of all Canadian entrepreneurs are out of business within the first five years, and out of those failed entrepreneurs, 29% said that the reason why their business failed was because they ran out of money. If entrepreneurs were better able to manage their finances, they could make better financial decisions in their business. One of the ways that they can do that, is by keeping accurate financial records, so that their interim financial statements can be as accurate as possible. When they use those more accurate financial statements to make financial decisions in their business, they increase their chances of being able to make better decisions.
When an entrepreneur has made a purchase, they need to either put it into their expense accounts, or their asset account. Expenses are those purchases that do not have a useful life longer than the purchase that has been made, where is an asset is something that will provide a lasting benefit to the business. When entrepreneurs purchase assets, the expense should not show up on their income statement right away. They should be prepared to see this, that they can ensure it was accounted for accurately. The reason is because if the asset showed up on the income statement in the month that it was purchased, it would make the finances of the month that it was purchased in look very terrible in comparison. Since that asset is going to benefit the business for a long time, it should not Take a large financial hit. Entrepreneurs are correct in knowing that it does need to appear on the income statement eventually, but outsourced CFO says it should go directly into the balance sheet first, and it will show up on the income statement at the end of the year once the entrepreneur and their accountant calculates the depreciation of it. The amount that it depreciates will show up on the income statement. Therefore, entrepreneurs should be looking at their income statement at the end of the year, to ensure all assets they have purchased in the year show up on the income statement.
As their asset depreciates, they going to end up with what is called the book value of the asset says outsourced CFO. When an entrepreneur is planning on selling and assets later on, they need to understand that their financial account will show the book value, but they are going to sell that asset for the fair market value. The fair market value is what they can reasonably expect to get financially when they sell that asset. Entrepreneurs need to understand that while the value is often a predictor of what the fair market value of their asset is going to be, that is not always the case. They may get much more or much less for their asset.
When entrepreneurs are calculating their assets and expenses on their interim financial statements, they should ensure that they are calculating assets and expenses into the right account, and are depreciating at the right amount so that they are keeping an accurate record of the exact value of those assets.
