Looking at the person or legal entity – corporations, limited liability company or limited partnership – you want to use the structure of your company, the decisions you make will depend largely on the current economic situation, both personally and professionally. But you know how to read their accounts? You know how to read your personal accounts and business?
Knowing that this is not only an important skill entrepreneurs, but for everyone. However, an entrepreneur to take this skill can mean the difference between having a thriving business that flourishes and filed for bankruptcy. Annals of bankruptcy courts are full of cases where entrepreneurs believe that the book to others, and can not read the accounts of his company, were surprised when they discovered that the movement was ultimately unsustainable. This article aims to prevent this from happening to you – and the hand skills necessary to structure your business to your advantage from the outset.
Their two main financial statements
There are two major accounts, every entrepreneur must know how to read and (ideally) prepare or have prepared their financial management software (we recommend QuickBooks):
Income Statement (also known as the P & L or income statement) provides a dynamic picture of your finances ebb and flow. In short, the results show first: A. Your various sources of income and then subtracts the cost of B. In order to obtain the net income: Net profit or loss generally will be shown on this statement, that their state and federal tax authorities at the end. Profit or loss (in output revenue) has been moved to the second major financial statements: Balance sheet.
Provides an overview of the combined results of its financial activities. It consists of two columns: the left has its assets
On the right is listed in your debt, and owners / shareholders’ equity (or ownership of the business). Two columns must be in balance, and that is why it’s called balance.
Assets = Liabilities + Equity
It’s really quite logical how the income statement and balance sheet relate to each other.
If you must use the asset in the short and long term to meet current expenditures during the year at the end of the year, the amount of its assets are reduced by the amount of net loss. On the right side, its capital has been reduced too. If you’ve borrowed, for example, $ 10,000 to pay current operating expenses at the end of the year, the assets remain the same, but its liabilities increased by $ 10,000, reducing its equity or ownership in the company for the same $ 10,000.
It does not take a genius to understand that if you continue down this road, you will soon be in a very difficult situation because of the liability to bear their own costs. The cost of borrowing is interest and if you’re lucky enough to borrow only 10% interest (on unsecured debt) today, a year from now you’ll pay $ 11,000 to pay the initial amount of 10,000 debts. This reduces your equity again – unless you used the borrowed money to create more assets whose value increases over the same pace as the interest on your debt, or even better – a higher rate.
More to the point of business units decide to use is that you must work both personal accounts and those of your company (s). If you find, for example, that you have a large salary or wage income in your personal account that is making you pay high taxes (as evidenced by your balance) and you expect your company will generate substantial losses for During the many years it would be beneficial for you to use a business unit through entity. Loss of your S-Corporation (or if you prefer, your partnership or your company with limited liability) will float on your personal balance to offset the wage and salary income, and thus reduce your taxes.
Moreover, in general, to set a roadmap to get where you want to go, you need to know your starting point. Therefore, the preparation and understanding of their personal and business financial statements is a necessary first step in planning your business
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