Outsourced CFO | How To Classify Assets On Financial Statements
Interim financial statements are used by entrepreneurs to make informed financial decisions in their business says outsourced CFO. Unfortunately, if menís are incorrect due to incorrectly booked asset purchases, it makes the income statements and accurate, and not a good tool for entrepreneurs to make decisions from. Since 50% of all entrepreneurs end up failing within five years of starting their business, and 29% of those failed entrepreneurs say the reason why they fail is because they ran out of money in their business, having the most accurate and up-to-date interim financial statements possible can significantly help entrepreneurs end up making the best financial decisions possible for their business and succeeding.
In order to be able to classify assets and expenses properly, entrepreneurs should know what the difference is between the two. An entrepreneur should consider anything an asset if it has a useful economic life of one year or more. For example, and vehicle is a great example of an assets because after it is purchased, it is going to serve the entrepreneur for longer than a year says outsourced CFO. And expense on the other hand is a purchase that a business owner makes that has no additional usage after its initial purchase. An example of this is purchasing paper for office supplies. Once it is used up it has no additional value.
Entrepreneurs should understand what are some very common types of assets in many businesses. Outsourced CFO says vehicles are one of the most common assets that are claimed. Other examples include leaseholder improvements, computers and real estate. Depending on what type of the business it is, there can be major equipment that is considered assets. For example, an x-ray machine in a doctorís office, a sewing machine in a clothing manufacturer, or an offset printing press in a print facility. As long as these assets fit the definition the account as assets.
I really important rule of them that entrepreneurs should keep in mind when they are classifying assets on their financial statements, is that they should not necessarily classify any assets that are less than thousand dollars. Outsourced CFO says the main reason for this is because it can take a significant amount of time classifying and depreciating all of the assets that an entrepreneur might have that are under thousand dollars. Rather than spend this time managing a list of assets that is not going to impact an entrepreneurs bottom line, they should be counted as expenses and then an entrepreneur can spend more of their time growing their business.
By truly understanding the difference between assets and expenses, entrepreneurs can ensure that they are keeping their interim financial statements accurate so that they can be used to make great financial decisions in their business. It is very important that not only do entrepreneurs need to use these interim financial statements, the accuracy of those financial statements factors greatly into help go to tool they are for business owners to make decisions from.
Outsourced CFO | How To Classify Assets On Financial Statements
It is extremely important that entrepreneurs work to ensure the accuracy of their interim financial statements says outsourced CFO. The reason for this is because entrepreneurs should be using these financial statements on a very regular basis in order to make informed financial decisions in their business. If they are not accurate, business owners will be using these financial statements to make decisions in their business and could be making poor decisions and not even know it because the financial statements are not correct. Learning how to keep correct and up-to-date interim financial statements is essential for entrepreneurs to have a great tool to make decisions with.
When making asset purchases in their business, entrepreneurs should understand how it shows up on their income statement. They may think that the asset purchase should directly show up there but outsourced CFO says that this is not correct. If that was the case, it would significantly and negatively impact that months finances when the purchase was made. Instead, the asset should actually bypass the income statement altogether in the beginning and be accounted directly onto the balance sheet. It will eventually show up on the income statement as it depreciates. Entrepreneurs will depreciate their assets on a yearly basis during their fiscal year end. They should ensure that all assets purchased throughout the year should show up on that income statement at that point.
In order to help entrepreneurs keep organized when they purchase assets, especially so that they have a great record of all of the assets in their business, outsourced CFO recommends setting up subaccounts for all significant fixed assets. This is most beneficial if the assets are going to be able to be purchased on individual basis for a significant amount of money. An example of this would be after a business owner has got as much use out of the vehicle as possible, there are more likely to be able to sell that vehicle for significant sum of money. By keeping track of these assets and subcategories, can help entrepreneurs have a great idea of all of the assets remaining in their business. This is even beneficial if an entrepreneur ever sells their business one day, he subaccounts will allow them to have a great list of all of the assets in their business.
When it comes to selling those assets, entrepreneurs should understand the difference between book value and market value of the asset. Since an entrepreneur will be depreciating those assets on a yearly basis, when they are ready to sell them, they will end up it is called a book value of the asset. It is put the cost of the asset is less the amount it is depreciated since the date was purchased. Outsourced CFO says the market value on the other hand is the amount of money that a business owner can reasonably expect to get for that asset. This can be a guideline that entrepreneurs can use, but they also should keep in mind that the book value and the market value may vary significantly. Entrepreneurs should understand that there assets will show as book value on their financial statements because it is the simplest way of calculating value.