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One of the first things that entrepreneurs should learn says outsourced CFO when learning how to book assets correctly, is what the definition of an asset is to a business. Fixed assets are anything that is purchased that has a useful economic life longer than a year. An expense on the other hand does not have a residual value after the initial purchase and usage. Great examples of fixed assets are vehicles, age or equipment, computers and real estate. Entrepreneurs might be surprised to learn that leaseholder improvements are also considered assets. The reason is because if an entrepreneur makes improvements to the location of the business, their way to be able to use those improvements to help run their business out of that building for a long period of time. Examples of an expense would be purchasing office supplies or advertising. Once that item was used, once that advertising period Has passed, there is no additional and residual benefits.
When entrepreneurs have purchased assets, they should understand how it should show up on their financial statements. Outsourced CFO says the first thing that they should know is that it will not appear on the income statement as an initial purchase. The reason for this is because if it was entered into the income statement, it would negatively impact the finances and the profit of the business in the month it was purchased. Since this is not accurate, because it will be used over a long period of time, therefore it should show up on the income statement on an ongoing basis, and for the useful life of the asset. Therefore, entrepreneurs should understand that it should go directly onto the balance sheet. The weight will show up on the income statement is at the end of the year once the accountant calculates the depreciated value of the fixed assets, that depreciated value will appear on the income statement. Business owners can ensure they are checking their financial statements at the end of the year to ensure all assets purchased in that year show up on the income statement.
By learning what assets versus expenses are, and how they get entered into their balance sheets and income statements, entrepreneurs can help ensure the accuracy of those interim financial statements in their business. This can help them be confident in making financial decisions in their business, being guided by these interim financial statements. Helping entrepreneurs make informed financial decisions can significantly help them avoid running out of money in their business.
A significant problem that entrepreneurs face in business says outsourced CFO, is that 50% of entrepreneurs fail in the first five years of owning a business. When asked about why their business failed, 29% said they failed in business because they ran out of money. Helping entrepreneurs use interim financial statements in order to make informed business decisions in their business, can help them avoid running out of money. Unfortunately, business owners need to be able to review their financial statements to ensure the accuracy, otherwise using incorrect financial statements to make decisions can put their business at risk.
When entrepreneurs are entering in fixed assets into their income statement, they should ensure that they are not entering in assets less than a thousand dollars. Outsourced CFO says that technically assets under thousand dollars account, but it is not necessarily a good use of a business ownerís time. Not only is it the time used to enter in those assets initially, but then time spent at the end of the year depreciating those assets. Rather than taking that time to do something that is not going to affect the bottom line in a significant way, business owners can instead use the time that they would have spent doing that, and put it into growing their business.
Another reason why entrepreneurs should not be entering in fixed assets under thousand dollars, is so that they can troubleshoot their interim financial statements and catch mistakes made in them. For example, if an entrepreneur sees that an amount less than a thousand dollars was entered into their asset account, that it is clearly a mistake. This is most likely having an expense entered into the wrong account. By being able to catch that mistake and back into the expense category, entrepreneurs can ensure the accuracy of the information in their business.
When entrepreneurs are entering in assets into their financial statements, a great practice to get into according to outsourced CFO is to set up subaccounts in that balance sheet. By staying organized, business owners can keep the maximum information on those assets, which not only can help them sell those assets later on in their business once they have stop being useful for businesses, but it can also help the entrepreneur sell their business, by having a great detailed list of all of the significant assets in their business. This is really beneficial for assets that are likely to be sold outside of the business for significant amount of money.
By learning how to account for expenses in fixed assets in their business says financial statements, can help entrepreneurs stay organized, catch mistakes, and have as accurate interim financial statements as possible. This can help them be confident in making financial decisions in their business, knowing that they have the most accurate and up-to-date information possible that can help them make great decisions.
