Learning how to read balance sheets and income statements can be difficult says Edmonton bookkeeping. And when entrepreneurs are new in business, they have a lot of questions about the information on these reports. Helping them understand the information is extremely important so that business owners can ensure that their understanding their report to its fullest extent so that they can use the information to help them make informed financial decisions in their business.
One of the first questions that entrepreneurs have when they are looking at their income statement, is how many income accounts should a business have? This is to keep track of all of the various products and services that an entrepreneur has in their business. A guideline that Edmonton bookkeeping likes to give is to have no more than three different categories. The reason for that is so that entrepreneurs can stay organized. Many more than that, and it can be difficult to be organized, however less than that, and businesses are not able to gain an understanding of exactly where there generating income in their business. For business owners and only have one main product or service, they should consider if they can organize that one product or service into any different categories to gain insight as to what is generating the most revenue for them.
The second question is should a business have costs of well sold accounts? This one is dependent on the type of business and entrepreneur owns. Service-based businesses like accountants and lawyers may not have any cost of goods sold accounts. The reason is that if they do not generate any expenses to provide the product or service, they will not have this account. This is an exception if a business owner has a professional working with them that provides that same product or service, like a lawyer who works with another lawyer. Then, they are labor would count towards the cost of goods sold the account. Other businesses that do incur costs by way of providing their products or services, should have a cost of goods sold account that is directly related to each of their income accounts. Whether they are a retail store, a manufacturer, or trade, they will have as many costs of goods sold account as they have income accounts.
The next question that entrepreneurs will have is what is the difference between the cost of goods sold and expenses? Edmonton bookkeeping says that the difference between the two is that the cost of goods is directly related to the income that they generate. The cost of goods is the cost that a business owner incurs by providing the products and services that they sell. The expenses, on the other hand, are all of the costs that exist in the business whether or not an entrepreneur sells their product. Examples of expenses would be rent, administrative staff, phones, Internet, utilities to name a few.
When small business owners gain a deeper understanding of their income statement says Edmonton bookkeeping, they will be able to make more informed financial decisions. Since half of the entrepreneurs fail in business by their fifth year, and 29% of those entrepreneurs who fail say the reason why their business was not successful was that they ran out of money in their business. Entrepreneurs who understand their income statements can avoid this problem.
One of the first questions that entrepreneurs have when they are understanding their income statement is what expenses should be included in their income statement? Edmonton bookkeeping says that all of the expenses that they should include are anything at all they need to run their business. It will include big things like rent, utilities, advertising, and office supplies, and will also include things like payroll expenses, owner salary, and professional fees. It is very important that an entrepreneur stays extremely organized with all of the expenses in their business and account for them appropriately in their income statement so that they can gain a clear picture of everything that is going on in their business.
The second question that many small business owners have when they are learning how to read their income statement is what can be posted to meals and entertainment? This is perhaps one of the most misunderstood expense categories by most entrepreneurs. Entrepreneurs often believe that they can put any of the meals that they eat in a restaurant in this category. However, the actual intent of this section says Edmonton bookkeeping is advertising purposes. Therefore, an entrepreneur should be considering why they are incurring these expenses in their business? An entrepreneur may be able to claim a meal or two if they are working overtime in their business, and if an entrepreneur is traveling is a part of their business, they will have no option but to eat in a restaurant. However, entrepreneurs should be using this account for things like entertaining current and prospective clients. This means that they can take them out for dinner, or even do things like take them out to a sporting event like hockey and can count in this expense account.
Another question that entrepreneurs often have when it comes to understanding their income statement, is how can the payroll expenses be organized? There are many different source deductions that entrepreneurs have to take off of their employee’s paychecks and these can all be organized here. This can help an entrepreneur understand how much taxes they have withheld from their employee’s checks, and how much they need to pay the Canada revenue agency. There is not just the employee contribution for CPP, the employer has a contribution for that as well, they also have to take off EI and income tax from their employee’s checks. Another payroll expense that business owners might want to put here is the health benefits that they take off of their employee’s checks.
By understanding all of the various sections in their income statement can help entrepreneurs stay organized and understand the information so that they can make more informed financial decisions in their business.