It is extremely important for entrepreneurs to become experts at reading income statements as well as their balance sheets say Edmonton bookkeeping. The reason for that is because entrepreneurs need to be able to read and understand their interim financial statements before they make any financial decisions in their business. Whether it is running payroll, or purchasing an asset, and manure’s can read their interim financial statements to understand if they can make those purchases or payments disbursements to ensure that they will not run out of money by making those decisions. If they cannot, they can come up with the plan, or engage in some revenue-generating activities or Accounts Receivable to bring that money in. This is extremely important if they are going to do that before they run payroll. Therefore, entrepreneurs must understand their income statement because it is one-half of their interim financial statements.
To first learn how to read their income statement well, and ten bookkeeping says that entrepreneurs need to understand all of the parts to the income statement. they are the revenue, which shows up as the income accounts in business, the cost of goods sold, as well as the expenses. When entrepreneurs are looking at their revenue, it will show up as income accounts. And many entrepreneurs wonder how many income accounts their business should have. While there is no real mandatory rule to follow, and no correct answer, the general rule of them is for entrepreneurs to have no more than three. The reason for that guideline is to help entrepreneurs get overwhelmed by trying to organize more income accounts than necessary. Quite often, business only has one main product or service that they offer, but break it out into categories for clarity. They would determine what their main three products or services are, and then use those as their income accounts.
An entrepreneur will also have the cost of goods sold account, and the number of accounts they have in this section will correlate directly to the number of income accounts they have. Edmonton bookkeeping says that an exception to this rule is, if an entrepreneur has a service-based business, and do not incur any cost of goods sold. Examples of businesses that would not have a cost of goods sold account, would be bookkeepers, accountants, and lawyers.
When looking at the cost of goods sold account, entrepreneurs will notice that there is a cost of goods sold account that directly relates to each of the income accounts. Each of the expenses for each of those lines of income will be accounted for. Some typical costs of goods sold would be labor and materials. Essentially, all of the costs associated with generating that item. A good rule of thumb for entrepreneurs to follow is that the cost of goods sold should explain the entrepreneur’s income in their business.
The financial literacy of many entrepreneurs is not significant says Edmonton bookkeeping, which is why entrepreneurs need to learn how to read their interim financial statements. To make informed financial decisions in their business, business owners need to be able to read those interim financial statements which their income statement is one half of. When entrepreneurs can make better financial decisions in their business, then they will be able to increase the ability to make informed business decisions.
When looking at the expenses of the business, many entrepreneurs say that they do not understand what the difference is between expenses and cost of goods sold. Business owners should understand that the costs of goods sold are related directly to manufacturing those products or services. Like labor and materials. Edmonton bookkeeping says that expenses are the things that an entrepreneur pays whether they make a sale in business or not. A lot of the examples of the expenses to a business are rent, utilities, office supplies, and advertising.
There are various expense categories that entrepreneurs need to understand so that they can put their expenses in the right category. This can help them stay organized and minimize expenses in the future. Payroll expenses are one where entrepreneurs not only need to be organized to put all the expenses but also so that they can categories all of the different expenses within that account. The reason for that is because Canada revenue agency takes such a serious look at source deductions that an entrepreneur is going to want to ensure that they are keeping a very good record of all of their payroll source deductions. In addition to the income tax, there is the EI and the employer and employee contributions to CPP. In addition to the source deductions, other payroll expenses can be the health benefits that a business owner deducts from their employee’s checks so that they have health benefits.
There are also other expense categories for all of the other expenses that do not fit anywhere else says Edmonton bookkeeping. For example, the owner’s salary. It should not be kept in with the employee salaries, because owners are not regular employees. They often will call these management fees. Other examples of expenses that do not fit into any of the categories include the rental income that an entrepreneur might get if they were the landlord. These expenses do not fit anywhere else, but they need to be included somewhere. By putting them here, they are being kept separate from traditional business expenses, all well staying relevant to business expenses.
When entrepreneurs can understand their income statement, and all of the different parts within that income statement, Edmonton bookkeeping says that business owners will be better able to understand their income statement, and how it relates to their balance sheet. By understanding both, business owners can use those interim financial statements to make informed financial decisions that not only can help them avoid financial problems in their business, but also be proactive in growing their business as well.