Outsourced CFO | how assets look on financial statements
Interim financial statements can help entrepreneurs have the right financial information on hand for when they need to make financial decisions in their business such as can they run payroll, or purchase assets in their business says outsourced CFO. However, if they are not properly booking their asset purchases and expenses into their financial statements properly, they end up with an accurate and unusable income statements. Helping entrepreneurs understand the difference between assets and expenses, and how to accurately enter them into their income statement and balance sheet, can significantly help them ensure the accuracy of those financial statements so that when they go to make decisions in their business, they can be certain that their making the right decision for their company.
The first thing that entrepreneurs should learn says outsourced CFO, is understanding what an asset is and what a expense is. Simply put, and asset of the business is anything that a business owner has purchased that has a useful benefit to the business longer than one year. A great example of this would be a vehicle, or major equipment that an entrepreneur buys such as a doctor buying an x-ray machine for their practice. An expense on the other hand is a purchase that an entrepreneur has made, that ceases having use after its initial purchase or usage. A great example of this would be office supplies. It is important for the entrepreneur to have, but once those office supplies are used, there is no additional benefit.
The next thing that entrepreneurs should understand once they know the difference between assets and expenses, is how they get entered in to their income statements and balance sheets. Assets show up on the income statement because that needs to impact the finances of the business. Staying on top of their expenses and minimizing them wherever possible can help an entrepreneur run a more profitable business. However, outsourced CFO says that entrepreneurs should avoid putting their fixed assets onto their income statement. The reason is because this is going to benefit the business over a long period of time, it should impact the income of the business over that same period of time. Because of that, entrepreneurs should keep in mind that when accounting for their assets, it should bypass the income statement and be put directly onto the balance sheet. At their fiscal year end, the business owner and their accountant will depreciate that asset, and the amount that it is depreciated will get entered into the income statement. By doing this every year, an entrepreneur can verify that the income of the business is being affected by that assets, as it is being used, not all at once.
By helping entrepreneurs understand the difference between assets and expenses, and how they show up on their financial statements can have a huge benefit to entrepreneurs says outsourced CFO. This can ensure that they are accounting for their expenses and assets properly, and the result is more accurate interim financial statements them to use in their business.
Outsourced CFO | how assets look on financial statements
Running into financial problems is a significant problem for many entrepreneurs says outsourced CFO. Industry Canada says that half of all Canadian entrepreneurs will have failed in their business by their fifty year. When asked why their business failed, 29% of those failed entrepreneurs said it was because their business ran out of money. Helping entrepreneurs make better financial decisions can impact their business positively, and help entrepreneurs avoid running out of money in their business. One way that business owners can help avoid this in their own business, is learn how to account for their fixed assets in their business accounting.
When entering in their assets into their balance sheets, outsourced CFO recommends entrepreneurs do not enter assets that are less than a thousand dollars. The main reason for this is because it ends up being a lot of time spent entering in assets that are not going to greatly affect the bottom line of the business. Business owners need to also keep in mind that it is not just entering those assets once, but every year they also need to calculate the depreciating value of those assets. Rather than spending a significant amount of time on these calculations, a business owner should simply claim those assets as an expense and spend the rest of the time building their business.
Other things that entrepreneurs should keep in mind when they are entering the fixed assets into their balance sheets, is to set up subaccounts in those balance sheets for significant assets. A business owner should consider a significant asset as one that is likely to be resold for significant amount of money says outsourced CFO. Examples of significant assets be vehicles. Not only are vehicles likely to be sold at a high value later on, but also entrepreneurs tend to get rid of the vehicles once they start having or maintenance on them, not because their useful life has ended. Computers on the other hand, usually are not sold for significant amount of money after an entrepreneurs done with them, usually because they have become obsolete by that point.
The benefits that entrepreneurs have two only entering in assets that are larger than thousand dollars into their balance sheet, is that if they see amounts being entered into the asset account that are under a thousand dollars, is owners will be able to know that this is a mistake and can put it directly into the expense account instead. Typical reasons for this mistake would be someone entering that expense into the wrong account. For example, if an entrepreneur buys an office printer for five hundred dollars, it should not be counted as an asset, even though it technically fits the definition, so someone could have easily that into the wrong account. By understanding this, and fixing mistakes as they see them, entrepreneurs can ensure the accuracy of their financial statements.
By learning not only how to enter in expenses and assets into their balance sheets and income statement, but also how to watch for errors, entrepreneurs can be more likely to end up with financial statements that can help them make better financial decisions in their business.