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In order for business owners to end up with accurate financial statements, is that they learn the difference between a fixed asset and an expense and how to enter those into their balance sheet and income statement properly. Doing that, can help entrepreneurs ensure that their interim financial statements are being kept accurate. A simple definition of what an asset is to the business, is anything that has a useful benefit to an entrepreneur longer than one year. An expense on the other hand is a purchase that an entrepreneur makes that does not have a lasting benefit past the initial purchase. Vehicles and major equipment are great examples of fixed assets in a business, while office supplies is a great example of an expense.
When entrepreneurs are accounting for the fixed assets that they have purchased in their business, they should understand that the expense should not be put onto the income statement. Outsourced CFO says the reason for this is because it would end up making that month that it was entered into the income statement look like it did not profit at all. Since this is an accurate, it profited, but an entrepreneur also purchased something that was going to continue to benefit the business, it needs to be accounted for slightly different. It should be put directly onto the balance sheet of the business. It will show up later on the income statement, once it has been calculated the amount that it is depreciated. That depreciation value is entered into the income statement, so that the amount that it costs a business is a spread out over the useful life of the asset.
Entrepreneurs should also understand that when they are entering in those asset purchases into their asset accounts, that they should set up subaccounts for any significant assets. This is great information if they are planning on selling those assets at a later date, or ever going to sell their business, and want to ensure that they have a very accurate record of all of the fixed assets in their business. If there is a good chance that an entrepreneur is going to be able to sell those assets for a profit, they should be entered into subaccounts. Examples of this would be vehicles. Businesses that use vehicles often, tend to sell them when their maintenance becomes a common occurrence in their business. Vehicles still have a lot of useful life left, and they can sell them for a significant amount of money. Computers on the other hand are great example of an asset that is likely not going to be able to be sold for profit, because usually once a business no longer needs them, they are also obsolete.
Helping entrepreneurs maintain the most accurate interim financial statements possible is important, and can help them make great financial decisions in their business says outsourced CFO. Since 50% of entrepreneurs end up failing in their business within five years, and 29% of those businesses say that the reason why they failed was because they ran out of money. Having accurate interim financial statements can help entrepreneurs make positive business decisions in their business that can help them avoid running into cash flow problems.
Understanding where to put assets in their financial statements and where to put expenses can be extremely important. A great rule that entrepreneurs should keep in mind when they are entering assets into their balance sheets, is not to enter assets less than a thousand dollars says outsourced CFO. The reason for this, is because it can end up taking an extremely large amount of time for an entrepreneur to enter in a significant amount of small assets, and it is not going to greatly impact the business is bottom-line to have those in the balance sheet. In addition to that, all assets need to be depreciated every year, and this can continue to take a large amount of time from an entrepreneur to calculate. This time is often better spent by the entrepreneur growing their business.
Another benefit to not calculating assets under a thousand dollars says outsourced CFO is that it can help entrepreneurs see mistakes in their interim financial statements. If they see small amounts being added into their asset account, that is under thousand dollars, they will easily be able to tell that those are mistakes. By moving those out of the asset account and into the expense account, can help entrepreneurs maintain accurate interim financial statements.
One of the reasons why entrepreneurs are going to want to ensure the most accurate accounting for assets possible, is because having accurate records will help them sell those assets later on in their business, or help them sell their business if they have an accurate record of all of the assets that they have. Business owners should also keep in mind that as their asset depreciates, what they have in their financial statements, is the book value of those assets. Outsourced CFO says the difference between book value and market value is important to know. Book value is what the cost of the asset is, minus the amount it is depreciated since it has been blocked. This is a mathematical equation, and that is what is counted for on the financial statements. However, the fair market value is the amount of money that an entrepreneur will be able to get for that assets. This means how much are willing to pay for that assets. Often, an entrepreneur will be able to predict what the fair market value is based on the book value, but this is not always an accurate reflection. When they go to sell their assets, they may get more or less than their value.
