Helping entrepreneurs understand how to read their income statement can be very impactful says Edmonton bookkeeping. The reason for this is so that entrepreneurs can end up making good financial decisions based on the information they see in that statement.
There are several things that entrepreneurs can learn about their income statements that can help them get important information from the statement. The first thing that entrepreneurs should learn is how many income accounts should there be on their income statement? There is no actual rule that entrepreneurs need to follow, but Edmonton bookkeeping recommends that entrepreneurs have no more than three. These income accounts can be for services or products that the business offers. Usually, a business owner will have one main product or service that they offer and those are broken down into up to three categories.
The next thing entrepreneurs should know is should their business has a cost of goods sold the account. Edmonton bookkeeping says that this is going to depend on the type of business that it is. Professionals like accountants, bookkeepers or lawyers probably will not have a cost of goods sold the account. However, businesses that are into manufacturing will have a cost of goods sold account, as well as trades like plumbers, construction workers, and electricians. And merchants like stores that sell a premade item such as clothing or gifts. Entrepreneurs should ask themselves what their product is, and that should help them decide if they should have a cost of goods sold account on their income statement.
Also, entrepreneurs should understand what the difference is between the cost of goods sold and expenses. The biggest difference between these two is that the cost of goods sold should be the costs that are directly related to the product that the business sells. This can help entrepreneurs keep track of the specific materials that went into the products that were sold. Another way of looking at it is that the cost of goods should explain the income of the business. Examples of the cost of goods sold would be labor and materials. Expenses, on the other hand, are the costs that are associated with running the business. An entrepreneur will incur these costs whether they sell any products in their business or not. Examples of expenses can be rent, utility, and phones.
When entrepreneurs are looking at their income statements, they should also understand what expenses should be included. And essentially anything that an entrepreneur needs to run their business should be included in the income statement. Rent, labor, gas to put in their vehicle, utilities, office supplies, or advertising are all examples of the expenses that should be included in the income statement. If they were needed to run the business, they should be included here.
By helping entrepreneurs understand their income statement, they can gain valuable insight as to the information on it, and use that information to make informed financial decisions in their business. When entrepreneurs can make informed financial decisions, they cannot only avoid financial difficulties but also learn how to grow their business.
Helping entrepreneurs understand the information on their income statement can help them significantly make informed financial decisions in their business says Edmonton bookkeeping. Since 50% of all entrepreneurs fail in business within five years, and 29% of all of those entrepreneurs that failed go on to say that the reason why their business failed was that they ran out of cash.
There are several things that entrepreneurs can learn about what should go on their income statement so that they can enter it correctly and end up with an extremely accurate reflection of their business. All of the expenses of the business will be included in the income statement, and entrepreneurs should also have a section for payroll, and all of the payroll expenses. Edmonton’s bookkeeping says that how those payroll expenses are organized on the income sheet is important. Business owners are going to want to include a section for all of the various source deductions. The source deductions must come off employees’ checks, and CRA will be ensuring that entrepreneurs send off all of the appropriate source deductions to them at the end of the year. These source deductions include CPP and there are the employee and employer contributions to that source deductions. There is also EI and income tax. There are also health benefits that entrepreneurs will be often deducted from their employee’s checks. And that should earn a line item in the payroll expenses on the income statement.
Business owners often wonder what should be posted to the professional fees section of their income statement. This section says Edmonton bookkeeping should be reserved specifically for those professions that have a professional be to belong to the organization such as accountants must be paid CPA, engineers must pay to keep up their P Eng. Doctors and lawyers also have to pay professional fees. If entrepreneurs do not need to pay to be a part of a professional organization to continue working in their profession, they do not need to put anything in this category.
Another expense category that entrepreneurs need to understand is the meals and entertainment section. Edmonton bookkeeping says that many entrepreneurs believe that they can eat out every day and count this as meals in this section. This is not accurate. Business owners must factor in why they are eating those meals. A traveling salesman, for example, has to eat out because they are away from home. An entrepreneur who has worked overtime can likely claim a couple of meals a week, but entrepreneurs should consider that the reason why this account exists is for advertising purposes, for taking out clients and trying to land prospective clients. It should be business-related expenses, and not just because of entrepreneurs hungry.
By understanding how to enter expenses into the income statement, can help entrepreneurs enter things incorrectly, end up with the best income statement possible for them to make decisions on their business with.