Reading a balance sheet is an extremely important skill for entrepreneurs to learn according to Edmonton Bookkeeping. The biggest reason for this is because one of the top three reasons for business failure in Canada is entrepreneurs running out of money. Learning how to read a balance sheet can help entrepreneurs understand their financial situation so that they can make better financial decisions including avoiding running out of money in their business.
When entrepreneurs are looking at their balance sheet, they should be able to see easily the information on it. At the top, it will be a list of their assets including cash, equipment, and vehicles. Next, it will be the loans including the shareholder loans of the company, and payables such as credit cards and bills. Knowing what information is on the balance sheets is extremely important.
When looking at the assets, and taking into consideration the cash in the bank accounts, entrepreneurs should keep in mind that best practices are for them to be keeping only one bank account for their business. Edmonton bookkeeping says that a business owner may decide to have a corporate checking account as well as a savings account, but there is no reason for entrepreneurs to have more than that. Some business owners believe that it is important to have many business accounts for many of the different taxes that they have to pay, in order to stay organized but all that does is end up costing the entrepreneur far more in bank fees than is necessary.
When looking at the balance sheet, it is also important for entrepreneurs to understand what Accounts Receivable and accounts payable are. Accounts Receivable is the amount of money that the business owner is owed. They have provided the product or service, invoice to clients and are waiting for payment. Accounts payable on the other hand is the exact opposite and are the amounts that the business owner owes others. They received a product or service, and need to pay their bill.
While it is good practices for entrepreneurs to ensure that they have their corporate credit card listed in the balance sheets, entrepreneurs may believe that their personal credit card belongs to the balance sheet as well. However, it is not considered good practice for personal credit cards are personal bank accounts to be listed in the balance sheet of the corporation recommends Edmonton bookkeeping. If an entrepreneur has ever paid for corporate expenses from their personal credit card, rather than putting it on the balance sheet, they should ensure that expense is listed in the shareholder’s loan account, not put the actual credit card on the balance sheet. Ideally an entrepreneur’s best practice is to not co-mingle business and personal bank accounts.
By keeping the balance sheet organized, and clean with only corporate expenses and assets, the entrepreneur has a better chance of ensuring that they can use it as a great tool to help them understand how the business is doing financially.
The reason it is important for entrepreneurs to know how to read their balance sheets, and know the information in it says Edmonton bookkeeping is so that they can have a better idea of the financial state of their business. By being able to read the balance sheet and how that relates to the income statement, business owners can use the information to figure out how much money they have in their business and if they need to do anything to generate more revenue or cut in the expenses. If an entrepreneur does not know the financial state of their business then they will not know how they can succeed in business.
When looking at the balance sheet, in addition to listing the cash, there should also be an area for entrepreneurs to list all of their assets. Edmonton bookkeeping says that all of the assets that they should include our anything that is used for business including if they own the building that they operate out of, vehicles and equipment. If entrepreneurs are claiming that a vehicle that they own is a business asset, they must ensure that they use it in their business and not just to drive to their workplace. For example, a construction company can claim they use their trucks to haul materials to their website, and so their truck can be at a company asset, but the doctor just driving his sports car to his practice and then the home cannot claim that car as an asset in the business. Unless he was using it for marketing purposes, and even if that is the claim business owners can only claim vehicles up to thirty thousand dollars on their balance sheet.
Something else that entrepreneurs should keep in mind when they are claiming their assets, is how many assets should a corporation have? This varies greatly from business to business some companies will have lots of assets, and some might not have any at all, especially if they are brand-new, and perhaps renting office space. A good rule of thumb when counting assets is that they should be over a thousand dollars, and have a useful lifespan of one year. Anything less than that, and entrepreneurs can tend to spend a lot of time trying to figure out how many assets under a thousand dollars they have and it is generally not a good use of their time.
By understanding, Edmonton Bookkeeping and the information on the balance sheet, and how to account for its, can help entrepreneurs start to understand the financial state of their business. Reading the balance sheet and seeing all of the assets the company owes, the money that the corporation is owed and how much the corporation owes others into the equity in the business paints a picture of the state of the finances of the corporation for an entrepreneur. Understanding that, can help a business owner plan in their business financially. Business owners need to understand the balance sheet first, and then learn how that corresponds to their income statement.