Learning how to read an income statement is extremely important says Edmonton bookkeeping. Not only can it help entrepreneurs stay organized with their finances, but reviewing the income statement on a regular basis can help entrepreneurs understand where the revenue in their business is coming from, the cost of generating that revenue and if they need to make any changes to generate any more income for their business. Business owners should get into the habit early on in their entrepreneurship in order to gain an understanding of their business finances. When used together with their balance sheet, these two reports can be an invaluable tool to help entrepreneurs make great business decisions.
When learning how to read their income statements, business owners should understand the information on it. They should see a revenue section that includes several different income accounts based on how many streams of revenue they have in their business. They will also have a cost of goods sold section which should directly relate back to all of the different income accounts in their business and Edmonton bookkeeping says the bottom of their income statement will show all of the expenses they incur in their business. Understanding each of those categories, especially how they relate to each other can help entrepreneurs gain a complete understanding of their income statement.
Many entrepreneurs made questions about why there are several income accounts even if they only have one main product or service in their business. The reason for this is simple says Edmonton bookkeeping, is if an entrepreneur can categorize even their one product or service into different areas, they will be able to gain a deeper understanding of where the revenue in their business is coming from, and the costs associated with generating that revenue.
Some industries might not even have any cost of goods sold account at all on their income statement. The reason for this is if they do not generate any cost associated with reducing their product or service, they will not have anything to put in this account. Examples of businesses that do not have any cost of goods sold account are accountants and lawyers. Once they have set up their practice, continuing to provide services does not cost them any additional money.
When looking at expenses, many entrepreneurs do not understand the difference between the cost of goods sold and expenses. Simply put, the cost of goods is the cost that when into the materials for the products that an entrepreneur sold. The cost of goods sold directly in contact with the products. Examples of this are labor and materials. Expenses, on the other hand, are all of the costs that a business owner incurred simply by being in business. These costs will exist whether or not an entrepreneur sells any products or services. Examples are rent, utility bills, and admin staff.
Entrepreneurs are able to gain a deeper understanding of their income statement and the information on it, they will be able to use that information to make more informed financial decisions in their business says Edmonton Bookkeeper.
Learning how to read all of the various financial reports of the business is extremely important says Edmonton bookkeeping. The two most important reports to review on a regular basis are the interim financial statements. Those include the balance sheet and the income statement. While entrepreneurs should be reviewing the balance sheet first, it is important that after they do, they review the income statement alongside that balance sheet because together, those two reports will help entrepreneurs make great decisions in their business. Since 15% of all entrepreneurs fail within the first year of their business, helping entrepreneurs make great business decisions early on in their entrepreneurship is extremely important.
Looking at the various expenses that are accounted for on the income statement, entrepreneurs should understand that those expenses should be posted to all of the various expense accounts on the income statement. If entrepreneurs do not know what expense accounts get what bills, they may end up with improper information in their income statement. One of the most common misconceptions is what can be posted into the meals and entertainment of the business. Edmonton bookkeeping says that the main reason for this account to exist is for advertising purposes, therefore an entrepreneur needs to be considering the reason why they had that meal or that cost of entertainment. Sometimes, entrepreneurs think that they can put all of their meals that they eat in the restaurant into this account, and while they can claim a couple of meals a week as overtime meals for business owners working overtime, it is intended purpose is for entrepreneurs to put the expenses of taking out their existing and prospective clients. Whether they took them to a meal, a sporting event, or other forms of entertainment, this is what should be included in this expense account. If an entrepreneur is traveling for business, they can claim all of the meals that they have, because they have no other option than to eat out.
Another category of expenses that many entrepreneurs have questions about is the professional fees section. Edmonton bookkeeping says that this should only be for business professionals who have a designation, and they need to pay professional fees to continue to belong to that profession so that they can continue to practice. Examples of this are chartered professional accountants, doctors, and dentists. Most of the time, typical business owners will not have to worry about this account. And it is not as some entrepreneurs believe a place to put things like their Chamber of Commerce membership.
When entrepreneurs are able to understand their income statement, it becomes a much more effective tool in helping them make guided and informed financial decisions in their business. Doing this can help entrepreneurs not only avoid financial problems but help them be proactive in understanding what they have to do to become even more profitable in business. Let us know if you need assistance!