Vancouver CPA | What Information Is on an Income Statement
The reasons why entrepreneurs make poor financial decisions in their business says Vancouver CPA. Is because they do not know how to make more informed decisions. Which is why they should set up an appointment with their accountant early on in their business.
They will learn not only what an income statement is. But why they need to learn how to read it. As well as when they should be looking at this report in their business.
The first thing that entrepreneurs should keep in mind. Is that the income statement will show all of their gross revenue, cost of sales. As well as all of the general expenses in their business.
So when they are making financial decisions. Whether it is paying bills, running payroll. Or making purchases and hiring staff. By looking at this income statement, they will be able to understand how much money they have to use.
By comparing their expenses and cost of sales to the revenue. Entrepreneurs will be able to see how much revenue they have generated, and if they can cover all of their expenses. And if so, a much money they have left over.
They also will be able to see if they have not been able to cover their expenses with the revenue. They can compare the general expenses, in order to see if they need to minimize those expenses. Or if they need to generate more revenue.
In order for business owners to be able to read this statement easily. Prior to making any financial decision. Vancouver CPA says it is of paramount importance. That they keep the income statement to a single page.
They can do that, by avoiding over classifying their expenses. And keeping them as broad as possible. A common mistake that entrepreneurs often make, is that in the effort of trying to have more information in their business and about their expenses. They over categorize all of their expenses.
Which not only makes their income statement longer and more confusing to read. And also creates the opportunity for mistakes to be made in the expenses. Which will not help entrepreneurs make more informed financial decisions.
It is far better for an entrepreneur to keep their expense classifications very broad. However, Vancouver CPA says if they truly want to look at the different types of expenses they generated in their business.
They should use subaccounts instead. Which will allow them the opportunity to pull different reports as they want to look at them. While keeping their income statement to a single page.
Once their income statement is a single page. They are going to be far more likely not only to read it. But they are going to be better able to understand the information, so that they can use that information to guide their financial decisions in their business.
Learning how to do this on their business is small is extremely important. Because as they grow, and have more revenue and more expenses. This becomes far more difficult.
If entrepreneurs want more information about how to read and understand their income statement. They can set up an appointment with their Vancouver CPA, and learn what they need to run a successful business.
Entrepreneurs are new in business says Vancouver CPA. They may never have had to know what an income statement is. And never had to read one. Although it is very important as an entrepreneur, that they learn this for their business.
The income statement is going to be a document that will help them understand how much money they have in their business. As well as what their expenses are, and if they need to minimize expenses. Or increase the revenue.
In the first step to learning how to read and income statement successfully says Vancouver CPA. Is Emily by understanding what the four main components are. On the income statement, and how that information is organized.
The first component is revenue, and is located at the very top of the income statement. And this is all of the gross revenue they have generated in their business. Through selling their products and services. Or invoicing their clients.
Below their revenue, will be the cost of sales. Which are all of the expenses directly related to producing the products and services that they sell. This should include material and labour. Whether the labour is staff that is on payroll, or an independent contractor does not matter.
It is very important to note, that if not nor did not have any sales in that month. They will not have cost of sales says Vancouver CPA. So that the easy way to figure out if things have been categorized incorrectly.
Below cost of sales will be the other expenses in the business. Often called overhead expenses, or general expenses. These are all of the bills that a notch been our must pay, before they have sold a single product or service in their business.
The most common expenses related to their overhead. Include rent or mortgage of their office space, salaries of their administrative staff. As well as things like utility bills, Internet or phone bills, and office supplies. They might even have things like equipment leases located here.
One of the most important things to note about general expenses, is that they should be listed in numerically descending order. So that the highest expenses are located at the top. And the least impactful expenses will be located at the bottom of the list.
The reason why this is important, is because if an entrepreneur needs to minimize expenses. They should do so first, by paying attention to the expenses that have the greatest impact on their bottom line. Because if they spend time minimizing the lower expenses, they will not impact their business very significantly.
And finally, Vancouver CPA says the last category is the other income and other expenses category. For all of the things that are legitimate corporate revenue and expenses. But do not necessarily relate back to the business directly.
Examples include corporate investments and corporate taxes. As well as things like income or expenses from rental property.
By understanding how the income statement is organized. And the information that is contained on it. Business owners will be able to be much more successful at learning how to read this information. Make more informed financial decisions.