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

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Outsourced CFO | The Differences Between Expenses And Fixed Assets

Interim financial statements of businesses are supposed to help entrepreneurs get the information they need in order to make important financial decisions in their business says outsourced CFO. Unfortunately, if the asset purchases in their business are not being booked correctly, the income statements end up being completely unusable. Warren Buffett, famous investor has been known to say, ìaccounting is the language of business.î Helping entrepreneurs understand the difference between assets and expenses, and how those should appear on their financial statements can help entrepreneurs ensure that those financial statements are being kept accurate from the beginning, and that business owners are able to review the statements for errors, and fix mistakes so that when they need to use that information to make financial decisions in their business, they have the most accurate and up-to-date information possible.

Entrepreneurs can use a very simple definition of what a fixed asset is in order to help understand how it should get account for in their income statement. Outsourced CFO says an asset is anything that an entrepreneur purchases that has a useful economic benefit longer than a year. This should demonstrate the difference between an asset and an expense. Because an expense on the other hand is a purchase that an entrepreneur makes that does not have a lasting benefit to the business. For example, a vehicle is a great example of an asset, because an entrepreneur is going to be able to use that for many years to benefit their business.

Outsourced CFO says that there are several different types of fixed assets and here is a list of some common ones: vehicles, as long as they are being used in the business. Computers, real estate. Any major equipment such as an x-ray machine. one surprising fixed assets that many entrepreneurs do not take into consideration immediately are any leaseholder improvements of the building. If an entrepreneur owns the building, and they have paid for improvements of that building such as new plumbing or electrical wiring, a new roof or siding on that building, it is going to benefit the business for years to come by providing a place for an entrepreneur to operate out of. Therefore it is counted as a fixed assets of the business.

Another consideration that entrepreneurs should have when counting but assets should be included on their income statement, and that is to not worry about including any asset under a thousand dollars. If entrepreneurs put in assets under that amount of money, it is technically accurate, however it comes down to what is the best use of an entrepreneurís time. It could take a long time for an entrepreneur not only to enter in all of those small assets, but also business owners need to keep in mind that they are going to have to depreciate those assets every single year. Figuring out the depreciating value of them, and accounting for each one might not be worth an entrepreneurís time. Instead, they can avoid counting those small assets and use their time to achieve the strategic priorities of their business instead.

Outsourced CFO | The Differences Between Expenses And Fixed Assets

Into it, the makers of QuickBooks did a survey to test entrepreneurs basic business literacy knowledge says outsourced CFO. They were asked questions about what a balance sheet is, and what information should be on interim financial statements. Out of all the respondents that answered the quiz, 82% scored less than 70%. Because many entrepreneurs lack understanding of a lot of basic accounting knowledge, learning what information should be on the interim financial statements, and how to account their assets and expenses in those interim financial statements can significantly help entrepreneurs end up with useful and accurate financial statements to make their decisions with.

An example of this is if entrepreneurs can understand when they purchase assets, they should not immediately see that expense on their income statement. The reason for that says outsourced CFO, is because it would end up making the month that the entrepreneur made that purchase look like they did not make any money in the business. But because are going to be using that asset for several years in the business, it should not negatively impact the businesses profit. Therefore, in order to ensure that the asset is accounted for, but it does not negatively impact the profit of the business, it should bypass the income statement and go directly onto the balance sheet. At the end of the year when that asset depreciates, the amount that it has depreciated will end up on the income statement. This way, the expense will end up matching the income but not negatively impacting the profit.

Entrepreneurs should also understand that when they are purchasing assets, that it is a good idea to set up subaccounts for those purchases says outsourced CFO. The reason is because this can help entrepreneurs stay organized and keep the most information possible on those assets. This is extremely beneficial when entrepreneurs plan on reselling those assets later on for profit, or if they plan on selling their business and want to have a good record of the assets of the business.

When entrepreneurs are depreciating the value of their assets, they are going to end up with what is called a book value says outsourced CFO. The book value is the cost of the asset less the amount it has depreciated since it was purchased. They will calculate the book value of the assets on their financial statements, but if an entrepreneur is selling that asset, they will be selling it at the fair market value, which is what it an entrepreneur will be able to get when they sell that asset. Often, the value can be a predictor of fair market value, but that is not necessarily the case. Entrepreneurs should not be surprised then when fair market value ends up being very different when they go to sell that asset in their business.