Disappearing Profit: Why Financial Statements Change After Accounting Adjustments
Why do my financial statements show a profit, but then show a loss after my accountant makes adjustments? If you’ve ever asked yourself that question you’re not alone.
Accurate financial statements must reflect many business expenses, and it’s not unusual for these adjustments to change profits after an accountant includes them all. If you’ve received statements back from an accountant and they show less profit than you expected (or loss), here are some possible reasons why.
Sales-Related Expenditures
Financial statements may not immediately reflect all of the expenses needed to produce a product/service.
For example, suppliers sometimes don’t send invoices until after those supplies have been used. Similarly, contracted service providers might bill 30 or even 90 days afterward. If there are still expenditures that will be due, a financial statement should reflect these.
An accountant will be familiar with what sorts of expenses your business incurs when producing its products/services. The accountant will make sure to include any that you might not yet have recorded. Any expenses that your accountant includes will have to be deducted from gross revenues.
Asset Depreciation and Amortization
Depreciation and amortization both account for the falling value of assets. Depreciation applies to physical assets (e.g., buildings, equipment, vehicles, etc.). Amortization applies to intangible assets (e.g., patents, franchise agreements, copyrights, etc.).
As these assets decline in value over time, their costs should be deducted throughout their useful life span. Even if your business doesn’t actually pay to renew or replace an asset in a given year, it theoretically must prepare for the future expense.
An accountant will know how assets can be depreciated or amortized according to tax regulations, and they’ll take care of the calculations for you. Although depreciation directly lowers your business’s profits, it’s something you should do. Your business will likely have to pay the cost eventually to replace the asset, and depreciating assets can provide significant tax benefits as it’s usually a write-off.
Standard Accounting Adjustments
A variety of standard accounting adjustments may have to be made to bring your business’s financial statements in line with accepted practice. Your business’s financial documents also won’t be complete and fully accurate until these adjustments are made.
An accountant will know what adjustments have to be made, and how to make them. Adjustments related to works in progress and inventory are fairly common, and businesses may have specialized expenses, too. Any of these can lower the bottom line when comparing the accurate documents to the unadjusted ones.
Learn how to better read and understand your financial statements with our Guide to Reading and Understanding Financial Statements for Business Owners.
Get Complete and Accurate Financial Documents
While you should always do your best compiling financial documents, realize that they likely won’t fully reflect your business’s finances until an accountant reviews them. You could very well see some adjustments that lower your business’s profits. If you’d like a review of your financial statements book a free consultation with us and let’s talk.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
