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One skill that entrepreneurs can learn in their business in order to increase the accuracy of their financial decisions says Edmonton bookkeeping is learning how to read their income statements properly. Their income statements are one-half of their interim financial statements that they get from their bookkeeper once a month, along with their balance sheets to help entrepreneurs understand how their business financing is going. Into it, the makers of the accounting software QuickBooks did a survey to test business owners’ basic business financial literacy. Business owners who took a quiz were asked questions about what the role of a balance sheet is, what are accruals as well as how to increase cash flow in their business. 82% of all of the respondents who took the quiz scored less than 70% on the test. Since many entrepreneurs lack a foundation in business finances, helping them understand how to read their interim financial statements like their income statement can help them significantly.

There are three things that entrepreneurs should see when they look at their income statement. Their revenue, their cost of goods sold and their expenses. By understanding what each of those sections is, and what information gets put there, can help entrepreneurs not only ensure that their information is accurate but how to use the information in their business to make decisions.

one of the first things that some entrepreneurs might notice is that they are actually missing the cost of goods sold account section on their income statement. Edmonton bookkeeping says that this is actually not an error, as long as there is a service type of business. Certain service-related industries may not actually incur additional costs as a way of generating their income. Businesses like accounting firms, lawyers’ offices, and bookkeepers are not likely to incur additional costs, therefore their cost of goods sold section will not exist.

When looking at their revenue section, entrepreneurs will notice that they have income accounts. Even if an entrepreneur only has one product or service, best practices are for entrepreneurs to split those up into categories. Edmonton bookkeeping says that the reason entrepreneur should do this, is so that they can see all the different revenue streams they have in their business so that they can figure out where they are making most of their money.

Another important reason why entrepreneurs should keep their various revenue streams separated is so that when they are entering in their cost of goods sold, they should be keeping track of the cost of goods as they relate to each of the income accounts. This way, entrepreneurs can ensure that not only are they giving track of the costs but also what costs are related to which revenue.

In my understanding of their income statements, Edmonton bookkeeping says that business owners can start to understand more of their own finances, which can help them make informed financial decisions in their business which can help them not only avoid problems but increase the revenue in their business as well.

Learning how to read their interim financial statements is important says Edmonton bookkeeping. There are two reports that entrepreneurs should recognize when reviewing their interim financial statements, one is the balance sheet and the other is the income statement. While the balance sheet is going to be able to sell businesses the overall financial position of their business like what their assets are compared to their liabilities, the income statement, on the other hand, are going to show the entrepreneur their revenue compared to the cost of goods sold. These are both important aspects of their business, that together tell a complete picture of the business’s finances.

Understanding how to read the income statement can be vital to an entrepreneur being able to make informed business decisions. One of the most misunderstood sections of the income statement is the expenses. Many entrepreneurs do not understand the difference between the cost of goods sold and the expenses of the business. Simply put, the cost of goods sold are the costs that are directly related to the products that the business sells. The expenses, on the other hand, are all of the costs that an entrepreneur generates from operating their business, whether or not they sell any products. Examples of the cost of goods sold our labor and materials. Examples of expenses are rent, advertising, and office supplies.

Once an entrepreneur understands what the expenses in their business are, they need to post them to the right expense accounts in their income statement. Edmonton bookkeeping says that this is the area where a lot of businesses make mistakes, so understanding it can benefit them greatly. The meals and entertainment seem to be one of the most commonly misunderstood categories because entrepreneurs often think they can post any mail that they eat in a restaurant to that account. Edmonton bookkeeping says that this account is actually for advertising purposes, and more specifically taking out potential and existing clients. Whether they go out to a restaurant, sporting events, or any other entertainment venue, these are the expenses that should be posted to this account. Some exceptions to this rule are if an entrepreneur works over time they can occasionally count those meals, if the entrepreneur is traveling and has no option but to eat out, these can count towards their meals and entertainment expense account.

There is also a section for entrepreneurs to post expenses that do not fit anywhere else. A great tip for entrepreneurs is to put their own salaries into this section says Edmonton bookkeeping. The reason is that business owners should be keeping that fee separate from employees’ time. Called management fees in this category, it can be a great place for entrepreneurs to ensure they are accounting for their own salary.

By understanding the expenses in their income statement can help entrepreneurs significantly in understanding their expenses, what they are spending money on in their business and how they can minimize those expenses necessary. This can help entrepreneurs be proactive in their business to help them increase the profit in their business.