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In order to ensure that they are putting their assets properly, outsourced CFO says entrepreneurs should understand what the definition of an asset is to businesses. Anything that an entrepreneur purchases that has a useful economic life longer than one year is counted as an asset. Therefore, expenses will be considered purchases that do not have a lasting benefits over a year. A great example of an asset is when a doctor purchases an x-ray machine for their practice. However, and expense might be considered the advertising costs for a month in that practice. The x-ray machine is going to be able to be used for many years to benefit the business, where is the advertising costs are going to stop after the advertising period is over.
Another rule entrepreneurs should use when booking assets in their business, is not to spend time including the assets that are under a thousand dollars in value. While technically assets can be considered assets if they are under thousand dollars, but it ends up being a question of what is worth an entrepreneurís time. It can take a lot of time to account for many smaller assets, as well as depreciating them at the end of every year. When an entrepreneur could take that time that they spend depreciating those assets every year and put it into growing their business or achieving the strategic priorities of their business.
Since entrepreneurs should not be calculating assets for anything under thousand dollars, if when they review their interim financial statements, they see a smaller entry into their acid account under thousand dollars, they can know that it is a mistake. Outsourced CFO says the likely culprit of that mistake is someone claiming that expense as an asset. An example of how this might have occurred, is if a business owner purchases an office printer for four hundred dollars. It might technically fit the description of an asset, but since it is under thousand dollars and should not be put into the asset account. By fixing this and taking out the asset and putting it into expenses can help entrepreneurs ensure that they have the most accurate information possible in their interim financial statements.
By being diligent as well as consistent when booking assets in their business, entrepreneurs can ensure that they have the most accurate information possible in order to make their financial decisions with.
Many entrepreneurs struggle to understand accounting terms in their business says outsourced CFO. This causes them to not have the most accurate financial statements possible, and can end up with statements that are an accurate causing them to make poor financial decisions in their business. If entrepreneurs can understand how to ensure the accuracy of those financial statements, especially when it comes to expenses and fixed assets, they can end up with a more accurate tool that can be used in their business to make more informed and better financial decisions that can improve and entrepreneurs business.
1 Important Way that entrepreneurs can review those interim financial statements to ensure that the expenses and assets have been accounted properly, is looking where the asset purchases ends up on their interim financial statements. An entrepreneur should understand that the expense should not show up on the income statement right away. Outsourced CFO says in fact, the asset should actually bypass income statement right away and go directly onto the balance sheet in the beginning. The reason why it should be calculated this way, is because if it goes directly onto the income statement, that would negatively impact the profit of the business. Since this purchases going to be benefiting the business for several years, it should not make the business look like it took a huge hit in that month. Therefore it should go directly onto the balance sheet. However, as soon as that asset depreciates, which is at the end of the year that amount that it depreciates should be entered in the income statement, so that it does get accounted for eventually.
Outsourced CFO says that this satisfies the accounting principle of revenue and expense matching principles. Where the expenses need to match the income that they generate. When looking at the income of a certain period of time, it should match the expenses of the same period of time. Ensuring that the income statement shows the fixed asset purchase in this way, satisfies that principal.
Something else that entrepreneurs should keep in mind when purchasing fixed assets in their business, is that they should be setting up subaccounts for those assets. Outsourced CFO says this is to help entrepreneurs stay organized and keep the maximum amount of information possible on those assets. The reason why this is important, is if an entrepreneur is more likely to sell those assets at the end of their useful life, or sell the business. Vehicles are a great example of an asset that will have for profit. Computers on the other hand while they are also considered assets, tend to have a low resale value, due to the fact that they become obsolete very quickly in a business, an entrepreneur goes to replace them it is because they have no useful life left.
By understanding how the fixed assets appear on their interim financial statements as well as their income statements and balance sheets, can help entrepreneurs ensure that the statements are accurate as possible, not just when they make the purchase, but moving forward as well.
