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

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Outsourced CFO | understanding how to enter assets into balance sheets

Entrepreneurs are often told that they need to review their interim financial statements in order to make informed decisions in their business says outsourced CFO. However, if they do not know how to enter asset purchases and expenses into their balance sheets and income statements, they can end up with mistakes which render those income statements as completely unusable. It can be easy for entrepreneurs to learn how to enter those assets and expenses into their financial statements, but business owners do not know what they do not know, and helping them understand can allow them to have better financial statements for more informed business decisions.

One of the first things that is going to help an entrepreneur keep track of those expenses and assets properly in their accounting software, is by understanding what the difference is between the two. Outsourced CFO says that entrepreneurs can use a simple definition of what an asset is to help make that decision. It is any purchase that an entrepreneur has made that has a useful economic life longer than one year. An example of an asset would be a vehicle, or real estate. An expense on the other hand provides no additional value passed the initial purchase. A great example of this would be office supplies. There are very needed for a business, but once those supplies are used they provide no additional benefit to the business.

Once an entrepreneur understands the difference between the two, the next thing that they should understand, is how to enter them into their income statements and balance sheets. Expenses says outsourced CFO get entered into the income statement of the business, because those expenses are needed to to help operate the business, and should count against the income earned in the business in that month. If a business owner purchased office supplies, then those office supplies would impact the income of that month. However, when entrepreneurs are entering in assets, it should not go into the income statement section. The reason for this is because since it is providing a value to the business over a longer period of time, it should not just effect finances of the business and one month. How this gets calculated is by entering in the depreciation of that asset into the income statement at the end of the year. Until then, business owners should put that asset directly into the balance sheet.

By understanding the difference between assets and expenses, and how those need to get calculated and entered into the income statements and balance sheets of the business, can help entrepreneurs ensure that their interim financial statements are being kept as accurate as possible because they are booking their purchases correctly. By doing this, entrepreneurs can end up with the most accurate interim financial statements possible, which will help them significantly use those statements in order to make informed business decisions. Whether it is purchasing and assets, disbursing payroll or paying vendors, using an accurate interim financial statements to make those decisions is vital.

Outsourced CFO | understanding how to enter assets into balance sheets

Industry Canada says that half of all entrepreneurs in Canada will fail within five years, 29% of those failed entrepreneurs say that running out of money is the reason why they fail, outsourced CFO says that this can be impacted if entrepreneurs gain the right financial knowledge in their business. One way they can do that, is learn how to enter assets and expenses into their interim financial statements, so entrepreneurs can make the most informed financial decision in their business that they can.

When entrepreneurs are entering in the assets into the balance sheets of their business, there is a great rule that they can keep in mind that can help them do that efficiently says outsourced CFO. By not entering any assets under a value of one thousand dollars can help entrepreneurs be efficient in booking assets. The reason for this is because even if an entrepreneur has a significant amount of assets under thousand dollars, entering those into their balance sheets are going to impact the interim financial statements very much. Also, an entrepreneur not only has to take the time to enter those assets in, but they should also remember that they have to depreciate those assets every year. Rather than taking a lot of time to enter and assets that are not going to affect the bottom line of the business, entrepreneurs can spend the time that they save in achieving the strategic priorities of their corporation, for growing their business.

Another benefit of not entering in small assets into their balance sheet, CFO says that they can also help entrepreneurs catch errors in their interim financial statements. If an entrepreneur sees that there has been an entry into an asset account under thousand dollars, it will easily be able to tell that that is a mistake. It is likely someone entering in an expense into the wrong account, so entrepreneurs can be confident that by moving that from the asset account into the expense account can help ensure the accuracy of their interim financial statements.

Something else for entrepreneurs to keep in mind when they are entering in assets into their balance sheets, is that if an entrepreneur has significant assets, ones that are most likely going to be resold on an individual basis for significant value, they should be setting up subaccounts in their balance sheet for those assets. Whether they are going to sell those assets later on, or potentially sell their business, this can help entrepreneurs stay organized and keep the most information possible on those assets. A good example of a significant asset would be a vehicle. Entrepreneurs tend to sell those as soon as they start having more maintenance, they will still be able to get a significant amount of money from them.

By understanding how to enter in the assets and expenses into their balance sheets and income statements, can help entrepreneurs stay organized, fix mistakes, and end up with great and accurate interim financial statements in order to make the most informed financial decisions in their business. This can help entrepreneurs not only avoid running out of money in their business, but can help them make proactive decisions that can help them grow their business as well.