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E-Myth – “Why most small businesses don’t work & what to do about it”

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Outsourced CFO | how to properly enter fixed assets into balance sheets

Making good financial decisions is extremely important to entrepreneurs says outsourced CFO. 50% of all Canadian entrepreneurs fail in the first five years of their business, and 29% of those entrepreneurs say that the reason why their business failed is because they ran out of money. Helping entrepreneurs maintain accurate interim financial statements can help them have the right information needed to make important financial decisions in their business. However, if entrepreneurs do not know how to enter assets or expenses into their accounting software, they will not end up with accurate interim financial statements at all.

In order to help entrepreneurs understand how to enter in assets and expenses properly, outsourced CFO says they need to understand what the definition of an asset is. This is a purchase that an entrepreneur has made that has a useful economic benefit of over one year. For example, a vehicle or computer counts as an asset. However, entrepreneurs may also want to ensure that they are not counting assets that are under a value of that thousand dollars into their accounting software and instead counting them as expenses. The reason for this is because entrepreneurs can end up spending a significant amount of time entering in lots of small assets into their balance sheet. That time can often be better spent growing their business, so a great recommendation is for entrepreneurs to enter any assets under thousand dollars as expenses in the income statement instead.

What this can do to a business, is help them see any mistakes in their interim financial statements. If they see small assets under of thousand dollars being entered into their asset account on their balance sheet, they will first be able to see is easily says outsourced CFO, but also be able to fix it easily, therefore ensuring their interim financial statements are being corrected quickly.

When entrepreneurs are entering in expenses, they will be entered into the income statement of the business. The reason for this, is because since the expense is intended for the month that it was purchased, it should impact that months finances. Outsourced CFO says that entrepreneurs should then understand that assets should not be entered into the income statement. The reason is, because it will be benefiting from that asset for at least the next year, so it should not negatively impact the income of one month, it should be spread out for the useful life of the asset. In order to do that, entrepreneurs need to put it directly onto the balance sheet. During their fiscal year end, their accountant will calculate the depreciated value, and enter that into the income statement of the business. That way, they can ensure that those assets are impacting the finances, but instead of one month taking of huge hit, it is calculated equally over several months as that asset is used.

When entrepreneurs learn how to enter in assets and expenses into their accounting software, it can ensure the accuracy of their interim financial statements, so that they can use that information to guide them towards the best financial decision possible in their business.

Outsourced CFO | how to properly enter fixed assets into balance sheets

Business owners should understand the importance of financial statements to their business says outsourced CFO. These documents help entrepreneurs understand how much money they have in their business, so that when they need to make a financial decision in their business such as purchasing an asset, running payroll, or paying their bills, business owners can make the right decision with that they can afford that are not. However if entrepreneurs are not accurately entering assets or expenses into their balance sheets and income statements properly, they end up with in accurate interim financial statements that do not help them understand how much money they have in their business, which cause them to put their business at risk of potentially running out of money in their business.

When entrepreneurs are entering in assets and expenses into their accounting software, they should understand that when entering the fixed assets, not only do they go into the balance sheet, but they also should be setting up subaccounts for those assets as well. Outsourced CFO says that this is extremely important, to help entrepreneurs stay organized in their business and to keep the most information about those assets intact. The reason why this is important, is if an entrepreneur is ever going to sell those assets at a later date, or if they are planning on ever selling their business, they will want to have an accurate list of all of the assets that they have in their business.

As the asset depreciates in value, an entrepreneur ends up having what is called the book value of an asset on their financial statements. It is a simple calculation and the best way that entrepreneurs can easily show that the asset has depreciated in value without a lot of additional work. When they go to sell that assets, they know the book value, but they are going to be getting what is called the fair market value of that assets. Outsourced CFO says that fair market value means whatever they can get for that assets, because it is how much people are willing to pay for it. Business owners should be aware that book value may be a predictor of what the fair market value of an asset is, but it is not always. People may pay more or less in the book value depending on what the market indicates that asset is worth. Keeping this in mind when they sell their assets, they may not recoup the book value on assets.

When entrepreneurs are entering in assets and expenses into their balance sheets and income statements, being extremely organized, fixing errors, and having simple depreciation calculation can help them ensure that they are going to be able to sell those assets for the maximum amount of money that they can when they are ready to let those assets go in their business. Entrepreneurs that purchase a lot of vehicles end up selling those vehicles once the maintenance cost gets too high, and is a good example of an asset that is most likely going to be resold for significant value.