Entrepreneurs should understand that the income statement is one half of an extremely important report that entrepreneurs need to be very familiar with says Edmonton bookkeeping. The interim financial statement is something that entrepreneurs need to get into the habit of reading and understanding completely every time they make a financial decision in their business. The reason for this is because I understanding this information, entrepreneurs can then make more informed financial decisions in their business. Entrepreneurs need to first review and understand their balance sheet, and once they have done that, reviewing their income statement is the next important part of reviewing their interim financial statements. Understanding how to read the income statement, therefore, is extremely important in using it make financial decisions.
A business owner should understand all of the different categories on their income statements. The top will contain the revenue of the business, and in up to three separate income accounts based on the various products or services they sell. There are also going to have a cost of goods sold section, one for each of the different income accounts they have unless they are in the service industry. Finally, the bottom of their income statement will show all of the expenses of the business. Edmonton bookkeeping says that entrepreneurs should understand each of those sections and what they mean to gain a complete understanding of their income statement.
Although there is no rule or correct answer on how many incomes accounts an entrepreneur should have, the recommendation is they should have no more than three. Having several more income accounts might become very cumbersome to a business owner to keep separate. In the case of a business that only has one main product or service, they may see if there are ways that it can be broken down into up to three categories.
When entrepreneurs are looking at the cost of goods sold, if they incur any costs by way of selling their services or goods, this will be counted here. Service industries like accountants and lawyers may not incur any expenses by way of selling their services, but for all other businesses will have a cost of goods account for each of their income accounts. Retail outlets, manufacturing facilities, and trades are all going to have the cost of goods sold.
Edmonton bookkeeping says that the reason why there will be a separate cost of goods sold for every different type of income account an entrepreneur will have in their income statement is so that entrepreneurs can keep track of each of the cost of goods that went into what products they sold. Simply put, the cost of goods should explain the income of the business.
By understanding how the revenue and the cost of goods sold books on the income statement of the business, Edmonton bookkeeping says entrepreneurs should be better prepared to understand this information and how it relates to their balance sheets to make informed decisions.
It is extremely important that entrepreneurs understand how to read and understand their income statement says Edmonton bookkeeping. The most important reason for this is because entrepreneurs should be reading and reviewing their interim financial statements before they make any financial decisions in their business. The income statement is one half of that report, and since 50% of all entrepreneurs fail in business within the first five years, and those entrepreneurs who fail, 29% of them say that the reason their business failed was that they ran out of money. Being able to make informed financial decisions is extremely important for entrepreneurs to be able to stay in business.
Once an entrepreneur understands the income accounts and the cost of goods sold accounts on their income statement, they should then understand how the expenses look at the report. Edmonton bookkeeping says that many entrepreneurs do not understand what the difference is between the cost of goods sold and expenses in their business. The difference is, the cost of goods sold is the expenses that have gone directly into producing the product or service that the business sells. This includes labor and materials. The expenses are all of the other costs associated with running the business, that is going to exist whether an entrepreneur makes a sale or not. These include rent and utilities for their office, advertising, and office supplies.
There are various expense accounts that entrepreneurs will be putting their expenses. They must categorize these expenses says Edmonton bookkeeping so that an entrepreneur can review their income statement to understand how to minimize those costs if they ever choose to. For example, it is not just enough that an entrepreneur needs to account for all of the payroll expenses, that those payroll expenses are organized by category. They have the source deductions as well as the health benefits that are deducted directly from the paychecks. The source deductions should be subcategorized so that an entrepreneur can look at their income statement and see how much source deductions they are supposed to pay for each employee each month. Because of how serious the Canada revenue agency takes these types of expenses, entrepreneurs need to be very sure that the information is accurate. There are the employer and employee contributions for CPP, income tax as well as EI.
Entrepreneurs often miss understanding what the professional fees section should before. Edmonton bookkeeping says that the only entrepreneurs that should worry about this are the business professionals who belong to a professional organization to continue to practice the type of business they have. Doctors, dentists, engineers, accountants, and lawyers are all going to be businesses that have professional fees. Graphic designers, bookkeepers, they are not going to have anything posted to this section ever.
When entrepreneurs can completely understand their income statement, that will help them use the information to understand their interim financial statements. Doing this can help business owners make more informed financial decisions in their business, which can directly impact the success of their business.