Outsourced CFO | how to properly classify assets
If entrepreneurs are improperly classifying their assets or their expenses, outsourced CFO says they may end up with interim financial statements that are inaccurate or unusable. Since 50% of entrepreneurs fail in business within five years, and 29% of those entrepreneurs say that the reason why they failed is because they ran out of money, ensuring the integrity of the interim financial statements is a huge point of importance for any entrepreneurs.
One way that business owners can ensure that they are classifying assets and expenses correctly, is to understand the difference between the two. A simple definition of what an asset is, is a purchase that an entrepreneur makes that has the item being of use to the entrepreneur for over a year. A vehicle is a great example of an asset. An expense on the other hand is a purchase that an entrepreneur can make that does not have an extended period of life passed the date of purchase. An example of an expense is some advertising that an entrepreneur can buy. It will serve a purpose, but when it is done it has no additional value to the entrepreneur.
Outsourced CFO says that when entrepreneurs are classifying these assets in their financial statements, they should not classify any assets that have a value less than a thousand dollars. The reason for this is because while many assets technically fit the definition of an asset, however an entrepreneur who is trying to take note of all of the potential assets under thousand dollars as well as take the time once a year to depreciate to those assets in their financial statements end up spending a lot of time managing these small assets, when their time is better spent growing their business. Therefore in order to ensure that business owners are not wasting too much of their time on things that are not going to affect their bottom line too much, using the rule of thumb of only counting assets over thousand dollars can help entrepreneurs know what assets they need to classify. For example, if an entrepreneur purchases an office printer for three hundred dollars it is technically considered an assets but a business owner can save a lot of time from trying to calculate the depreciating value of a printer over years and claim it is an expense.
Entrepreneurs who see small changes in their asset accounts should understand that it is a likely mistake of claiming an expense as an assets. Since all of the assets that an entrepreneur should be putting in the asset account are all over a thousand dollars, entries less than that are usually because an expense was entered as an asset. By reviewing their interim financial statements for these types of errors, can help an entrepreneur ensure that their interim financial statements are as accurate as possible.
When calculating their interim financial statements, outsourced CFO says understanding how to account for assets as well as expenses can help business owners ensure that these financial statements are as accurate as possible so that when they make financial decisions in their business, they are using as accurate financial statements as possible.
Outsourced CFO | how to properly classify assets
Interim financial statements are a great tool that entrepreneurs can use to help them make informed financial decisions says outsourced CFO. However, if transactions concerning major equipment and purchases such as vehicles or real estate are booked incorrectly, this makes the interim financial statements inaccurate. Business owners need to do everything that they can to ensure the accuracy of these interim financial statements so that when they use them to make financial decisions in their business they can make the best possible decision for their business.
One of the first things that entrepreneurs should understand when they are purchasing assets in their business is that these expenses should not show up on their income statements. Outsourced CFO says they eventually will show up there, but they are not going to show up on the income statement right away. Instead, these purchases are going to go directly onto the business is balance sheet and will only show up on the income statement as it depreciates. Since most entrepreneurs will depreciate their equipment once a year at their fiscal year end they should not expect to see it on their income statement until then.
In order to help keep entrepreneurs organized when making asset purchases in their business, is to set up subaccounts for all significant fixed asset purchases. This can help keep entrepreneurs organized especially when these assets are most likely to be resold for significant value. Vehicles are a great example of fixed assets that are most likely going to be resold later for significant value. By setting up subaccounts in their income statements can help entrepreneurs have a very good record of what was purchased and how it depreciated. This is also very helpful says outsourced CFO if entrepreneurs are ever planning on selling their business, to have an extremely thorough list of all fixed assets in the business.
Something else that can help entrepreneurs understand the value of their assets, is by depreciating their assets on a yearly basis, they are going to end up with a book value of their assets. Book value and market value are two different things, because the book value is the cost of an asset less what it has depreciated since it was purchased. The market value is the amount of money that can reasonably be expected when selling an asset. The reason why it is important to understand the difference between the two, is because book value and market value can greatly differ. Entrepreneurs need to know this if they ever go to sell their assets, that they may be selling it at market value that has a very different book value from what they have.