For the business owners, their accountants, and managers, or anyone who is looking to pursue one of those roles, do you know business financials? I asked this because I see too many tax returns not being prepared to their fullest tax benefits. Your financials will include a profit and loss statement (PL) which demonstrates the income and expense for that month and a balance sheet (BS), which is a compilation of your assets and liabilities on a year-to-date basis. The financials reflect one of two reporting methods used for accounting purposes. Your financials are either prepared on a cash or accrual accounting basis. Cash accounting reflects the income received and expenses paid for a given month. Accrual accounting reflects all sales “earned and billed” for that month, and all expenses “due or charged” that month, whether they were paid or not. Small businesses may only get one year-end financial report when they file taxes.
When looking at the financials, most will immediately look at the bottom line, meaning the profits or losses. But are you aware of the tremendous tool your financials are? Did you know there are other key areas of your financials used to provide you with knowledge of the reasons for any losses, or how you can also use that information to succeed at stabilizing profits?
The Profit and loss statement, in my eyes, is divided into three sections :
1. Income (sales)
2. Cost of Goods Sold (income credit)
3. Expenses
The reason I separate the financials into three sections in my mind is that the Cost of Goods Sold (COGS) is a 100% income tax credit to the total income earned (accrual) or received (cash). This is where I find many accountants are not getting it! They are not taking the time to get to know your business. Reporting those expenses as supplies or materials does not provide you with the best tax benefit, as when they are reported as COGS. I will share more on financials later.
I hope many of you have found this information helpful as you continue to build value in your business.
Be a LEADER!