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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 the differences between assets and expenses

Ensuring the accuracy of their interim financial statements should be of utmost importance to entrepreneurs according to outsourced CFO. The reason is because these interim financial statements help entrepreneurs make informed financial decisions in their business such as can they afford to run payroll, or if they can purchase an asset in their business or if they need to obtain financing. If these interim financial statements are not accurate, it can cause entrepreneurs to make for business decisions that could put their company at risk. Understanding the difference between assets and expenses, and how to account for them and their financial statements can help entrepreneurs ensure that those interim financial statements are as accurate as possible, so that those financial decisions they make can be as good as they possibly can be.

Entrepreneurs should be able to use this simple definition of what an asset is in order to help guide where they put their purchases in their accounting software. An asset is a purchase that ends in entrepreneur having something that has a useful economic benefit for at least one year. Great examples of assets for businesses are vehicles, computers, and real estate. Expenses on the other hand are purchases that, while necessary, are not providing long-lasting economic benefit to the business. An example of an expense would be purchasing advertising. It is purchased and once the advertising is done, it provides no additional or ongoing benefits to the business the way up entrepreneur would be able to continue driving a car after they have purchased it.

When entrepreneurs are learning how to enter assets and expenses into their accounting software, they should learn that expenses get put into the income statement. The reason for this says outsourced CFO, is because the expense of the business need to match up to the income that they generate. Therefore, pairing up the expense in the month that it was purchased and the income it was generated make sense. However, when entrepreneurs are entering in fixed assets, it should not show up on the income statement. The reason for this, is since the asset is going to be providing a long economic benefit to the business, it should not negatively impact the income statement in its entire purchase cost for that one month. It should show up on the income statement eventually, but not for the entire amount that it initially cost the business. Therefore, entrepreneurs need to understand that it should be put directly onto the balance sheet first, and at the end of the year when their accountant calculates the depreciated value, that amount that it depreciates will end up on the income statement. This way, the impact of making that asset purchase can be spread out through the useful life of that asset.

By understanding the difference between assets and expenses, and how to enter those into their accounting software can help entrepreneurs have the most accurate interim financial statements possible. That can help entrepreneurs make better and more informed financial decisions in their business and avoid running out of money.

Outsourced CFO | understanding the differences between assets and expenses

One of the most significant problems that entrepreneurs face in business says outsourced CFO, is running out of money. 29% of all Canadian entrepreneurs who failed in business said that the reason why their business failed was because they ran out of money. When entrepreneurs are making financial decisions in their business, they should be looking at interim financial statements to help them understand if they have the finances in their company to make those decisions. However, if they have entered in their transactions incorrectly, they will end up with inaccurate interim financial statements, and that puts their business at risk for making poor financial decisions not even knowing it.

One of the first things that entrepreneurs should learn when they are entering in assets and expenses into their accounting software, is that they should not be adding assets less than thousand dollars into their balance sheet. Outsourced CFO says the reason for this is because it can take an extraordinary amount of time for an entrepreneur to enter in all of the potential assets under thousand dollars, and not only do entrepreneurs have to add it once, but they have to continually depreciate those assets every year. This time can often be better spent growing their business or achieving the strategic priorities of their corporation. Instead, entrepreneurs should count those assets under thousand dollars as an expense and move on.

There is an additional benefit to entrepreneurs claiming those assets as an expense if there under thousand dollars, and that is helping outsourced CFO says that if entrepreneurs see smaller amounts entered into their asset account that are under thousand dollars, they can tell immediately that it is a mistake. The mistake was most likely entering in an expense into the asset account by mistake. By seeing this error and fixing it right away, business owners can ensure the integrity of their interim financial statements are kept.

Something else that entrepreneurs should keep in mind when they are entering in assets into the else sheet of their business, is that if they are significant assets, meaning they are more likely to be sold at a later date for a significant amount of money, in an effort to not only stay organized, but keep the most information that they possibly can on those assets, entrepreneurs should set up the subaccounts for those assets in their balance sheet. This can help entrepreneurs have the most information possible when they go to sell those assets at a later date. Such as vehicles. Outsourced CFO says that once an entrepreneur is spending more time maintaining those vehicles, they often sell them, but at a significant value. Computers on the other hand are usually not resold for a significant amount of money, because there usually obsolete by that time.

Helping entrepreneurs maintain the integrity of the information the enter into their balance sheets and income statements is important in ensuring the accuracy of their interim financial statements. By learning how to enter the information as well as review for errors can be significant in ensuring that entrepreneurs have a great tool to help them make informed financial decisions in their business.