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

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Outsourced CFO | entering in fixed assets into balance sheets

Keeping accurate interim financial statements can be easy once an entrepreneur knows what to do says outsourced CFO. However, if entrepreneurs do not know how to enter fixed assets and expenses into their balance sheets and income statements, they can end up with an accurate interim financial statements. Not only can this cause business owners to make poor financial decisions in their business, you can also lead to inaccurate financial records of those assets. By learning how to enter in assets and expenses properly, entrepreneurs can have a huge positive impact on their business.

One of the first things that can help an entrepreneur ensure that they are entering in assets and expenses into their balance sheet properly is understanding what the definition of an asset is. It is any purchase that an entrepreneur has made that has a useful value to the business longer than one year. Great examples of fixed assets in businesses include vehicles, computers, real estate as well as major equipment such as x-ray machines or embroidery machines. outsourced CFO says that entrepreneurs may be surprised to discover that leaseholder improvements are also considered fixed assets and not expenses. The reason is because after those leaseholder improvements were made, it is going to continue benefiting the business for years, by giving them an important place to operate their business out of. For example, if an entrepreneur puts a new roof on their building, or improves the plumbing, that is going to positively impact the business for many years.

Expenses on the other hand says outsourced CFO, are the purchases that an entrepreneur makes that is a by product of doing business, it has no useful value outside of its intended use, and therefore needs to get calculated differently. Examples of expenses in a business would be office supplies or advertising. There extremely important to businesses, but after those supplies have been used, or that advertising has been made, there is no residual benefit there.

One of the most important things that entrepreneurs should understand on how to enter those expenses or assets into their accounting software, is that expenses go into the income statement says outsourced CFO, because they are an expense of doing business, and should count against the income of the business. Assets on the other hand, should not show up on the income statement. The reason for this is because it is going to benefit the business for several years, so rather than showing up as one huge purchase and one month which could negatively impact the finances of that month, it needs to get spread out on the income statements over the useful life of that asset. Therefore, business owners should put that asset onto the balance sheet instead. At the end of their fiscal year, the business owner and their accountant will depreciate that assets, and put that depreciated value onto their income statement. Each year it depreciates, it will appear on the income statement of the business, ensuring that it does impact the finances of business, but as that asset is used, and not all in one month.

Outsourced CFO | entering in fixed assets into balance sheets

It is extremely important that entrepreneurs learn how to enter in fixed assets and expenses into their accounting software says outsourced CFO. As Warren Buffett was famous for saying, ìaccounting is the language of businessî. Helping entrepreneurs become financially literate in their business, can help them end up entering in their expenses and assets into their software properly, so that they can end up with accurate interim financial statements in their business. When they go to make important financial decisions, using those accurate financial statements can help entrepreneurs make the right decision for their business.

Once an entrepreneur learns what an asset is, and that it should be entered into the balance sheet, entrepreneurs should then learn that they do not need to be entering in assets less than a thousand dollars. While it might be technically accurate to do that, outsourced CFO recommends that entrepreneurs do not spend their time doing this. Not only can it take an extremely long time, but at the end of the year a business owner also has to depreciate all of those assets, and the time spent entering them and depreciating those assets is not going to have a great impact on the businesses bottom line. An entrepreneur is better to spend their time growing or marketing their business.

A great benefits of only entering in assets over a thousand dollars into their asset account on their balance sheet, is that if an entrepreneur reviews their interim financial statements and see that there is an asset entered into that account smaller than a thousand dollars, they will be able to see that it is clearly a mistake. This mistake usually was the result of an expense being entered into the wrong account. By being able to easily see that, and fixing it right away, can help entrepreneurs end up with the most accurate interim financial statements for their business.

The next thing that entrepreneurs should do when they are entering in assets is to create subaccounts for significant fixed assets. The reason for this is because it can help entrepreneurs stay organized with a list of all of the significant assets in their business. Outsourced CFO says that not only can this help them sell their business at a later date, by having a great list of all assets, but it can also help entrepreneurs have the most information available should they decide to sell those assets at a later date. Vehicles are a great example of assets that are most likely going to be resold, and be resold for significant amount of money.

Helping entrepreneurs understand how to enter in expenses and assets accurately, fix mistakes and keep good records can help them significantly make more informed financial decisions in their business. Booking their assets properly results in entrepreneurs having accurate interim financial statements in their business. Before a business owner makes any financial decisions, they should be reviewing those interim financial statements to see if they have money in their business to be making those decisions.