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

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Outsourced CFO | fixed assets versus expenses

Helping entrepreneurs be financially literate in their business can be a significant help says outsourced CFO. When entrepreneurs use their interim financial statements in order to make business decisions, ensuring the accuracy of those financial statements is extremely important. Increasing the financial literacy in their businesses can help entrepreneurs review those interim financial statements as well as their income statement and balance sheet to verify the accuracy of the information, so that they can end up with the most accurate tool for making informed business decisions.

In great way that entrepreneurs can help ensure the accuracy of their interim financial statements, is learning how to account for fixed assets and expenses in their business. Outsourced CFO says that a simple definition of a fixed asset is, is anything that an entrepreneur has purchased that has a useful economic benefit to the business over one year. A great example of assets in a business can be vehicles, computers and real estate. Expenses on the other hand, do not provide it to the business past its initial purchase. An example of this would be a business owner purchasing office supplies, or advertising. They provide a useful benefit to the business, but not longer than the time. That they are in use.

One of the first things that entrepreneurs should learn when it comes to accounting for the assets in their business, is to not worry about calculating and accounting for assets that are less than a thousand dollars. Instead of putting them into their asset account on their balance sheet, they should claim them as an expense. Outsourced CFO says that the reason for this is because it can take a lot of time for entrepreneurs to be entering in smaller assets into their balance sheets, and once they have done that, they have to depreciate those assets every year. This could end up taking a significant amount of time that an entrepreneur might be better off growing their business with that time instead. Lots of small assets are not going to greatly impact the bottom line if they are counted as assets, so learning how to make the most efficient use of their time is important.

This can also help entrepreneurs catch mistakes on their income statements and balance sheets. The reason is because since an entrepreneur is only entering in assets that are over a thousand dollars, if they happen to see a smaller amount of being entered in, they can easily tell that it is a mistake. By moving that out of the asset account and into the expense account, entrepreneurs can help ensure that their interim financial statements are being kept as accurate as possible.

In order for entrepreneurs to make the best informed decisions possible, they can learn basic business finances, so that they can help ensure the interim financial statements are accurate, and then use those statements to make informed decisions in their business. By doing this, entrepreneurs can ensure that whatever financial decision they make in their business is as positive as it could possibly be.

Outsourced CFO | fixed assets versus expenses

Entrepreneurs need to be using their interim financial statements in their business to make informed decisions says outsourced CFO. Unfortunately, if they are not entering in their business transactions concerning assets properly, they end up with income statements that are completely unusable. Entrepreneurs can learn how to enter in fixed assets and expenses into their income statements and balance sheets properly, so that they can end up with the most accurate financial statements possible.

The first things that entrepreneurs should keep in mind when they are entering in assets into their accounting software, is that the asset should not show up on the income statement. Outsourced CFO says at least not initially. The reason for that is because the asset should not been to the income statement, because it would make the finances of that month look negative, because it would affect the profit of the business. Since it is going to be an asset that provides a long lasting benefit to the business, it should not negatively impact the finances of one month. Instead, it should impact the finances of the business over the length of time that it is useful. Therefore, the proper way to account for fixed assets is to put them directly onto the balance sheet first. It is important that they do come out of the income statement eventually, but this happens at the end of the year during the businesses fiscal year end. The amount that it is calculated to have depreciated in the air is what is put on the income statement.

It is very important that the accounting matching principle is satisfied with asset purchases. This matching principle is that the expenses need to match the income that they generate. If an entrepreneur looks at a period of time in the business, the income should match the expenses of the same period of time. By accounting for the assets by putting them directly onto the balance sheet and showing up on the income statement as they depreciate ensures that this principle is satisfied.

Something else that entrepreneurs should keep in mind when they are entering in their assets into the balance sheet, is that they should set up subaccounts for significant fixed assets such as vehicles. This can help entrepreneurs stay organized, and keep the maximum amount of information on those assets as possible. This is beneficial if an entrepreneur is ever planning on selling those assets, or if there ever going to be selling their business, and want to have a great record of all of the assets in their business. Vehicles are great example of assets that are likely to be resold for a significant value.

Outsourced CFO says that learning how to enter in assets and expenses into the balance sheet and income statement of the business is not difficult, but the outcome is entrepreneurs having the most accurate interim financial statements possible, that can help guide them to make good financial decisions in their business.