Hello and welcome to another episode of always up to date. Uh, my name is Denise Mitra, and this is yellow a Mattew. Goudas. Uh, and we are a coroners of always bookkeeping. Uh, so we already, last time you talked to me, talked about what was, should be on your balance sheet. Uh, so this week we’re going to talk about what should be on your income statements. Okay. Um, so, um, we have a quote, uh, today from Warren buffet, um, who’s, uh, uh, an all time grain investor. Um, and his quote is accounting is the language of business with Edmonton Bookkeeping.
And the statistic that we have is from the Fraser Institute. Uh, so the average Canadian pays 43% of income in taxes, uh, which is like tax, CPP, E, I, G, S, T, fuel tax, et cetera. And by comparison, on average, only 37% of the remaining income goes towards basic necessities such as shelter, food, and clothing as you use Edmonton Bookkeeping.
Um, so often business owners don’t know how to read their income statement, don’t really know what should go on the income statement, and therefore they end up, um, making decisions based on incorrect information. So I have a few questions that you might want to ask yourself when you’re looking at your income statement. And then, uh, Denise and I will kind of discuss what, um, what are the answers for those questions. So the first one I have is how many income accounts should you should a business have? Yeah. So really there’s no rule on how many you should have. We recommend no more than three. Usually you, um, a business has one main product that they sell. Um, and it could be a product or a service. Um, and so sometimes they can be broken up into different categories. Um, if you have that in your business, then we would recommend trying to figure out what the main three are and using those as your income accounts with Edmonton Bookkeeping.
Yeah. Uh, should a business have cost of goods sold accounts? So it depends on the business that you have. Um, lots of businesses such as, um, accountants or lawyers, those types of businesses that are more of a service don’t usually have cost of goods sold. Um, it’s more if you’re in an industry like construction or plumbing or those types of, of um, industries. Um, that’s where you would have the cost of goods sold. And especially for, um, uh, merchandising businesses that actually sell retail items. They call it your cost of consult would be the item that you actually, um, did you actually sold the four businesses that have services. Very rare that you would have a cost of labor because most of the small businesses operates with just one person, which is the owner. So it’s a little harder to, uh, detract your hours unless you’re tracking an hour just for the, um, afforded purpose of doing the service and not necessarily the back admin.
That’s right. So, um, how many costs of good sold accounts should a business have? Yeah, so your cost of goods sold, um, accounts should sort of correlate with your income accounts. So if you have three income accounts, um, we would recommend and having three costs of goods, souls. Um, sometimes again, there might be some more depending on what kind of products you, you sell. Um, but often if there’s an income account and a cost of goods sold account, they should kind of correlate with each other just so you can keep track of, um, what’s going into, um, like what you’re selling that correlates with that income that you’re bringing in. And especially looking at your profit margin, you wanted to make sure what actually is available for you to pay the overhead or any admin items that you’re paying. So if you’re looking at your income and your cost of goods sold account, you want to make sure that your costs of goods sold kind of explains your income, especially the profit margin that you’re trying to target.
Right? Yeah. Yeah. Um, how many costs of, Oh, or sorry, what is the difference between cost of goods sold and expenses? Yeah, so like we said, the cost of good souls kind of correlates with your income. Um, it’s, so basically what it is is that you are paying the money to get, uh, um, IX sort of the expenses that go with your, whatever product you’re selling, but you’re gonna get that back with the income. So your client is going to pay you that back, sort of in your, in your invoice where an expense is more the, um, expenses that you need to run your business. So if you have rent, then that’s an expense. It’s not a cost of goods sold. Um, cause it’s not correlating directly with an income item. It’s something that you generally need. So whether you sell a product or not, you still have to pay rent.
So it’s kind of, those are sort of the fixed costs in a sense. Not all of them are fixed, but in a sense it’s kind of more fixed because it’s based on you. You just have to have it to run your business. Yeah, absolutely. You want to think of, um, your direct costs and what really is, um, in it in a sense that, um, direct costs are the ones that actually are touching your product. So who’s making your product? That’s your cost of labor, what is being sold that you’re, that’s your direct material or what makes your product, that’s your direct materials. So that’s kinda, that’s um, those are the kind of stuff would go into your cost of goods sold. That’s right. Yeah. Yeah. Um, what expenses should be included in the income statement? Yeah, so, um, like we talked about the expenses or anything that you’re going to use to run your business with Edmonton Bookkeeping.
So if you have rent, if you have employees that you need to pay, um, you might have, um, like if you drive places you might have, um, like gas or, um, uh, yeah, all of those kinds of things need to be in their office supplies. Um, if you do a lot of mail-outs, not many people do that now a days, but, you know, possibly any advertising costs that you have, those are all expenses that go into the income statement. Um, what can be posted to meals and entertainment. Yeah. So meals and entertainment, it seems pretty obvious. Um, but one of the things that a lot of people get messed up on is that they think if they own a business, they can eat out every day and just charge it to the company. But really you can’t, um, if you work somewhere where you’re close to your home, you’re not traveling a lot, maybe a couple of meals a day, a week as over time meals as we use Edmonton Bookkeeping.
You can, you can claim but you can’t claim meals for every day. Again, it has to be sort of, um, based on how much income you’re bringing in. And um, now it’s different if you work out of town, if you’re traveling a lot for your business, if you’re a sales person, say, and that’s a big part of your income is to travel. That’s a different story. You can claim more meals. Yeah, like daily. Absolutely. And you have to think about like the reasonability of why you’re incurring the expense, not just meals. Um, and so for meals, um, most of the time of people would just clean meals because they ate out and they were, they have a business expense, which in a way it is okay. But if you look at the actual purpose of having the meals and entertainment, it has mostly something to do with advertising Edmonton Bookkeeping.