One of the most important things that an entrepreneur can do in their business, is to learn how to read their interim financial statements says Edmonton bookkeeping. The reason for this is because those interim financial statements can help entrepreneurs make informed financial decisions in their business. The first report and their financial statement are a balance sheet, and once an entrepreneur has read that and corrected all errors, they should move on to the second report which is the income statement. This can help an entrepreneur understand the complete finances of the business, and can help them minimize their expenses. To do that, however, entrepreneurs need to understand all of the various parts of the income statement so that they know all of the important sections of this report.
An entrepreneur should understand that the income statement will show the revenue of the business, the cost of goods sold as well as the expenses. At the top of the report, the revenue will be included in income accounts. Edmonton bookkeeping says that there is no real rule for entrepreneurs to follow on how many income accounts they should have, but the general recommendation is for entrepreneurs to have no more than three. These can be the services or products that a business sells. Usually, a business has one main product or service that they sell but it is broken down into categories. The recommendation is for entrepreneurs to figure out what the main three categories of their product or service are.
The next section will be the cost of goods sold. Whether or not a business has this on their income statement is going to depend on the type of business that they have. Edmonton bookkeeping says that service-based businesses like accountants, lawyers or bookkeepers most likely will not have a cost of goods sold an account. If they have staff, that do the same thing that they do, like to bookkeepers working out of the same office, they may have that person’s labor as a cost of goods sold, but that would be the only exception.
The cost of goods sold for businesses that are not service-related would be anything that the business needs to purchase to sell that product. Retail stores have to purchase their goods from somewhere, whether they are books, clothing, or food. If they are manufacturing companies, the supplies that they purchase to make those products would count as a cost of goods sold as is the labor of the employees that manufacture those products. Trades are also going to be included in the cost of goods sold, like plumbers, construction workers, and electricians.
By understanding the information on their income statement, not only can help entrepreneurs classify that information correctly and they enter it themselves, but can also ensure that they understand the information so that they can use it to make better financial decisions in their business.
Entrepreneurs must learn how to read and income statements say Edmonton bookkeeping. Before they make any financial decision in their business, entrepreneurs should get into the habit of reviewing their interim financial statements. The interim financial statements include the balance sheet of the business as well as the income statement. It is extremely important that entrepreneurs understand that, and review those reports as carefully as possible so that they can end up making the best decisions they can in their business.
To properly enter in expenses into their income statement, Edmonton bookkeeping says that entrepreneurs should understand the difference between the cost of goods sold and expenses. The cost of goods should correspond directly to the products or services that the entrepreneur sells. These are the things that entrepreneurs going to need to buy to sell their products. If they do not sell any products, they can claim the amount.
Expenses, on the other hand, are the costs that the business incurs just by existing. Whether or not an entrepreneur sells products, these expenses will exist. They include rent of the office space, utility bills, administrative staff, advertising, and office supplies. Because of how many expenses that could potentially exist in a business, there is an entire section on the income statement devoted just to keeping track of all of the expenses in each of their categories. Many entrepreneurs do not understand a lot of these expense categories, so it makes it difficult for them to understand.
One of the expense categories says Edmonton bookkeeping is the meals and entertainment section. On many entrepreneurs believe this is where they can eat out every single day, and claim it to the expense category, this is not correct. Entrepreneurs should be considering the reason why they are eating those meals. If they just do not feel like cooking at home, they cannot claim that as an expense. However, if they are working overtime in their business, if they are wining and dining a client, or trying to land a future client, and even if they are a traveling salesperson and they have no other option than to eat out of the restaurant, all of those good fit under meals and entertainment.
It is also important that entrepreneurs should understand how their payroll expenses should be organized in their income statement. It is not just enough for entrepreneurs to put everything as a lump sum in this section, they should be organized by what the payroll expenses are. There is the employee contribution for CPP, the employer section for CPP, income tax and EI. Entrepreneurs must keep these separated because when they send off their taxes to Canada revenue agency, they are going to want to ensure that it is as accurate as possible, so they know exactly how much they should be sending.
By understanding all of these categories, entrepreneurs can end up with the most accurate income statement possible, so that the decisions they make in their business financially, will be the best possible ones for them as well as their business.