Outsourced CFO | how to account for fixed assets versus expenses

Entrepreneurs can start to make great decisions about asset purchases if they understood what a great definition of an asset was. Outsourced CFO says that this is anything that has a useful economic life over one year. An expense on the other hand does not have that useful life. For example, an entrepreneur would consider a vehicle they bought as an asset because they are going to be able to use that vehicle over and over for several years., but the office supplies that they bought not counted, because once the office supplies are used up there is no additional benefit to the business.

While technically entrepreneurs can have assets that are less than thousand dollars, but outsourced CFO recommends that entrepreneurs do not calculate assets under thousand dollars. It comes down to a best use of an entrepreneurís time. Even if there is several assets that a business has that are worth less than a thousand dollars, taking the time to enter in all of these assets and then spending time each year to depreciate those assets until they eventually drop off the income statement can take a significant amount of time while not overall impacting the bottom line of the business. An entrepreneur can put their time towards generating new revenue, or achieving the strategic priorities of the business. Understanding the best way to spend time in their business is an important determination.

Because of that thousand dollar guideline, entrepreneurs who see smaller changes in their income statements of under thousand dollars in their asset accounts, should understand that that is an error. Outsourced CFO says the error is likely due to someone improperly claiming that expense as an asset. For example, if an entrepreneur purchases an office printer for four hundred dollars, it may have been improperly entered as an asset, because it makes sense by the definition, but since it is under thousand dollars a business owner should be able to move it from their asset account and into their expense account.

By understanding the difference between fixed assets and expense in a business and how that changes how the interim financial statements look, entrepreneurs can have the most accurate financial statements possible in order to make informed financial business decisions. Since half of all entrepreneurs end up failing in business in the first five years, helping entrepreneurs make good and informed financial decisions can be extremely beneficial to them succeeding. Outsourced CFO says that business owners who understand this can avoid running out of money in their business.

Outsourced CFO | how to account for fixed assets versus expenses

It is extremely important that entrepreneurs end up with the most accurate interim financial statements possible says outsourced CFO. The reason for this is because business owners use those interim financial statements, balance sheets and income statements in order to make informed financial decisions in their business. If they end up booking fixed asset purchases in correctly, they render their income statements completely unusable. The most frightening thing is many entrepreneurs do not even know that these income statements are inaccurate. Therefore they use them to make financial decisions and put their business at risk.

Several things that entrepreneurs should keep in mind when they are purchasing assets and incurring expenses in their business, is learning how to account those purchases in their business can make a huge impact on their income statements. For example, outsourced CFO says entrepreneurs need to understand when they purchase assets how they show up on income statements. Many entrepreneurs believe that those assets should show up on their income statement right away. However if this is the case, it would negatively impact that entrepreneurs business in that month showing that they did not make a profit because of that purchase however since that asset is going to have a useful life of several years, it should not show it as being a negative purchase for business. Therefore that asset purchase should bypass the income statement and be put directly on the balance sheet of the business. How it will appear on the income statement is later on in the business when an entrepreneur depreciates that asset during their fiscal year end.

This ends up satisfying the important accounting principle of matching principles says outsourced CFO. This principle means that the expenses need to match the income that they generate. So that when looking at the income of the time period, it should match the expenses of the same time period.

In order to help entrepreneurs stay very organized with all of their asset purchases, they should set up subaccounts says outsourced CFO. This is an extremely good idea if entrepreneurs have a significant number of assets, ascended and if you get number of the same type of assets, or if they are planning on selling these assets at a later date. A great example of a business that would have significant assets that they would then sell for profit would be a car rental company. Bill purchase a lot of cars and as soon as those cars cost any amount of money to maintain, they will sell them for profit.

By understanding how the assets and expenses will look in the interim financial statements of their business, outsourced CFO says that business owners can ensure that their income statements are as accurate as possible, so that when they use those financial documents to make business decisions, they will make positive decisions that can positively impact their business.