Outsourced CFO | What Are The Differences Between Assets And Expenses
One of the biggest mistakes that entrepreneurs can make when classifying assets and expenses in their business according to outsourced CFO, is booking asset purchases incorrectly. This can end up causing income statements to be completely unusable. When business owners go to use those interim financial statements in order to make financial decisions in their business, they could end up putting their business at risk because the financial statements are wrong. There are simple ways that entrepreneurs can avoid this, and they should learn as early as they can their business so that they can ensure the accuracy of these extremely important documents in their business.
In order for entrepreneurs to understand the difference between asset and expenses, entrepreneurs just need to remember this simple definition says outsourced CFO: any purchases that have a useful economic benefit of over one year are fixed assets. Examples of fixed assets in businesses are vehicles, computers, real estate. Leaseholder improvements can even be considered fixed assets, because making improvements to the building where the business is conducted is considered an asset. As long as the business is benefiting for a significant period of time accountants. Therefore, putting up walls fixing a roof changing the plumbing or the electrical is going to benefit that business for a long time. Other major equipment that can be considered fixed assets in a business are for example an x-ray machine in a doctorís office, or embroidery machine in the clothing manufacturers place.
Expenses on the other hand matter how expensive they are, serve no additional purpose after the purchase. Examples of expenses in the business could be considered buying a spot on a billboard to advertise the business, purchasing office supplies for the business. Outsourced CFO says understanding the difference between assets and expenses can help an entrepreneur ensure that their accounting for those items properly in their interim financial statements.
Something else for entrepreneurs to keep in mind when they are calculating the assets in their business, is to not count in asset if it costs less than thousand dollars. Even though it might technically fit the description, outsourced CFO says that this comes down to an effective use of time. Even if an entrepreneur has several assets under thousand dollars in their business, taking the time to account for those assets, and then calculate the depreciation of them each year can take a significant amount of time. An entrepreneur might be better off using that time to achieve the strategic priorities of their business, going the revenue of their business, or developing their product. By putting their time towards what is most important and impactful of their business, business owners can avoid spending a lot of time on activities that are going to impact their business is finances greatly.
When entrepreneurs learn how to appropriately account for their fixed assets as well as expenses in their business, they will end up with more accurate interim financial statements that can help them more efficiently and accurately make financial decisions in their business that will positively impact their business.
Outsourced CFO | what are the differences between assets and expenses
The importance of interim financial statements to entrepreneurs is huge says outsourced CFO. These interim financial statements can help entrepreneurs make decisions on how to operate their business. Unfortunately, if these interim financial statements are incorrect, business owners can end up making financial decisions that can negatively impact their business. One way that these interim financial statements can end up with the wrong information in them, is when it comes to booking fixed assets in the corporation. If these transactions are booked incorrectly, the income statements can become unusable. To avoid this, entrepreneurs can understand what the difference is between an asset and an expense and how those should appear on their income statements so that even if they have made a mistake they can fix it before it negatively impacts their business.
Because assets should be considered any purchases that an entrepreneur has made that has a long-standing benefit to the business, however not under thousand dollars, if an entrepreneur sees a small change in their asset account, that should be an indication that there has been an error made somewhere. Outsourced CFO says that there is generally a likely culprit in this scenario. A purchase was made, and the expense was mistakenly put into the acid account of the business. An example of how this could happen, is if an entrepreneur buys an office printer for their business, and it cost them five hundred dollars, it could be considered an asset but because it is under thousand dollars it should be counted as an expense. When entrepreneurs see small changes in their acid account less than a thousand dollars a can put that expense where it belongs so that it does not negatively impact their income statement.
When entrepreneurs are looking at the assets in their interim financial statements, outsourced CFO says they should not be alarmed if they do not see expenses that they purchased in that year show up on their income statement. This is correct because if an asset purchase was put onto the income statement immediately, it would cause that months finances to the extremely poor. To get around this, the asset should bypass the income statement at first and gets directly onto the balance sheet. It will show up on the income statement later, as it depreciates. Since an entrepreneur will depreciate all of their assets at the end of the year when they do their corporate year end, they should check to make sure all of their assets have been noted on the income statement by the amount they depreciate.
By understanding how these asset purchases should look on their income statements, business owners cannot only fix errors, but ensure the accuracy of their interim financial statements so that they can be certain that when they make their financial decisions based on those statements that there accurate and they can make the decisions confidently and positively impact their business.