In order to help entrepreneurs understand their business finances, Edmonton bookkeeping says learning how to read their income statements can be extremely beneficial. Along with their balance sheet, these two reports make up entrepreneurs interim financial statements that they should be using before making any business purchases or any other financial decisions in their business. The reason why this is important is it can help an entrepreneur understand what their financial situation is prior to making any decisions regarding money. For example, if they look up their balance sheet and income statement to see if they can afford to run payroll, they might discover that they cannot and that they will have the time to generate more sales and engage in some Accounts Receivable activities to ensure that they bring the money in for payroll. If entrepreneurs did not do this, they would risk running payroll and not having the money for that payment to clear.
In order for an entrepreneur to understand how to read their income statement, they should first understand what they are looking at when they view the report. Edmonton bookkeeping says the top of the report will have the revenue of the business in a variety of income accounts. The cost of goods sold will have the same number of accounts as their income accounts and finally at the bottom will be the expenses of the business. Many entrepreneurs might ask how many income accounts should the business have. While there is no actual rule that business owners need to follow, Edmonton bookkeeping recommends that entrepreneurs stick to no more than three. Within three can be difficult to manage as well as difficult to be consistent in. However, having only one might not give an entrepreneur the insights they need to understand where the revenue in their business is coming from.
Although entrepreneurs should expect to see the same number of cost of goods sold accounts as income accounts, there is an exception to this rule. If they are a service industry, that does not generate any cost when it comes to producing their product, they may not have any cost of goods sold account at all. Businesses like lawyers and accountants may not incur any additional costs by way of doing their service and if that is the case, they will not have any cost of goods sold section of their income statement.
If it is a business that does incur the cost of goods sold, they will have the same number of accounts as income accounts, so that they can keep track of all of the costs for each of those streams of revenue. These costs of goods sold can range from anything including pain for the labor of the employees who may that product, to retail businesses that purchase premade items to resell like clothing, books or food. And it can also account for all of the raw materials that manufacturing facilities need to create their products as well. The cost of goods sold can also relate to businesses in the trades like plumbers, and electricians. They are very service-based, but they also have a component of providing some materials as well. If that is the case, then they will have the cost of goods sold as well.
helping entrepreneurs completely understand their income statements can help them understand the finances of their business says Edmonton bookkeeping. It is important to note however that entrepreneur should not be reading their income statement first, or by itself. It is one half of an important financial statement that can help entrepreneurs gain a deeper level of understanding of the finances of their business. The first thing that entrepreneurs should do is learn how to read their balance sheets. Not only does it have the ability to help entrepreneurs catch mistakes a lot easier, it also is going to give an entrepreneur a broader picture of their business finances. Once an entrepreneur has caught those mistakes and understood their balance sheet, then they can look at their income statement and use it alongside the balance sheet to see the financial health of their business.
One of the biggest questions that entrepreneurs have when it comes to understanding their income statement says Edmonton bookkeeping is knowing what the difference between their cost of goods sold and their expenses are. The cost of goods sold is keeping track of all of the materials that went into the products that an entrepreneur sold. The cogs should explain what income the business had. Examples of the cost of goods sold are raw materials and labor. Expenses, on the other hand, are the costs that are associated with running the business. These are the costs that are going to exist whether or not an entrepreneur sells their product or not. Examples of expenses in business are advertising costs, phone bills, and advertising.
It is very important that entrepreneurs need to keep track of their expenses so that they can keep track of all of the things that are costing money in their business, and see if they can minimize those expenses. However, some of the expenses cannot be minimized such as payroll expenses. Edmonton bookkeeping says that entrepreneurs should keep track of their payroll expenses in their income statement, primarily so that they can understand and keep track of all of the various source deductions taken from their employee’s checks so that they know how much to send to Canada revenue agency. This is a cost that cannot be minimized, because there is a specific amount of taxes that an entrepreneur needs to send to the government, or else they will get penalized.
The understanding the expenses in their business and on their income statement can help entrepreneurs understand if there is any way to minimize the expenses and keep track of the expenses that they cannot minimize. By doing this, business owners are able to gain insight as to the finances of their business, where their money is coming from, how it is being generated and expenses of the business.