ACCOUNTING
2 BOOKS IN 1:
ACCOUNTING PRINCIPLES + BOOKKEEPING
& QUICKBOOKS: HOW TO MANAGE
BUSINESS FINANCES,AVOID OVERPAYMENTS
AND INCREASE PROFITS OVERCOMING
EVERY FISCAL OBSTACLE IN THE BEST WAY
CHRIS FINANCE
TABLE OF CONTENTS
TABLE OF CONTENTS
I ntroduction
4
Chapter1 An introduction to accounting principles and important terminology
What are Accounting Principles?
The Definition of Accounting Principles
The Alternative Accounting Principles
Why Are Accounting Principles Needed?
Chapter 2 An introduction to accounting methods and statements
Cash Accounting Method
How to Use the Cash Accounting Method
Accrual Accounting Method
Chapter 3 Gaap concepts and assumptions
Chapter4 Gaap Versus Non-Gaap
Understanding the four basic gaap principles
Chapter 5 Detecting And Preventing Fraud
Digital Fraud
Paper Fraud
Compartmentalizing Personal Information
Shredding Documents
Home Safes
Safeguarding Personal Information
Being Vigilant
Check Your Credit Report
Stopping Opportunities for Fraudsters
Chapter 6 The N1 Tax Management Strategy To Save Money
Tax Planning
12
Chapter 7 Different Types Of Accounting Principles
Effective Strategies of Accounting Principles
The Accrual Principle
The Cash Principle
The Economic Entity Principle
The Monetary Unit Principle
The Conservatism Principle
The Consistency Principle
The Full Disclosure Principle
The Going Concern Principle
The Matching Principle
The Materiality Principle
The Reliability Principle
Chapter 8 The Cost Principles
Chapter 9 Revenue Recognition Principle
Chapter 10 The Time Period Principle
Chapter 11 Applying The Principles Of Accounting To The Accounting Cycle
Step 1: Identification and Analysis of Business Transactions
Step 2: Journal Entries
Step 3: Posting Entries to the Ledger
Step 4: Creating the Unadjusted Trial Balance
Step 5: Adjusting Entries
Step 6: Adjusted Trial Balance
Step 7: Financial Statements
Step 8: Closing Entries
Step 9: Post-Closing Trial Balance
Chapter 12 Applying What You’ve Learned
Chapter 13 Cash Flow, Functions And Working Capital For Effective Accounting
Cash Flow in Detail
Why do we need Cash?
Chapter 14 The Difference Between Principles And Rules
Chapter 15 Key Financial Statements
Types Of Financial Statements
Chapter 16 Common Terms Used in Accounting
Conclusion
* Bonus Chapters
-Tips and tricks to get small business accounting right
-Globalization and accounting
-Flawless & profitable business accounting
-Ways To Reap Profits In Real Time
Introduction
Chapter 17 . What Is Bookkeeping
Chapter 18 . The Differences Beetween Accounting And Bookkeeping
Chapter 19 . The Importance Of Bookkeeping
Chapter 20 . Types Of Bookkeeping
Chapter 21 . Function Of An Accounting Officer
Chapter 22 . What Is An Asset
Chapter 23 . What Is A Current Assets
Chapter 24 . What Is A Non-Current Assets Liabilities
Long-Term Assets ……………………………………………………………………….
FixedAssets …………………………………………………………………………….
Depreciation …………………………………………………………………………….
Chapter 25 . Current Liabilities
Chapter 26 . Non Current Liabilities
Chapter 27 . Balance Sheets
How Can I Use This Financial Document?
The Balance Sheet For The Securities And Exchange Commission
Chapter 28 . Capitals
Chapter 29 . Debits And Credits
Importance Of Debit And Credit Accounting
Chapter 30 . Recording Debit And Credit In An Account
Summary Of Debit And Credit
Chapter 3 1 What Is A Financial Statement
Benefits Of Financial Statements
Limitations Of Financial Statements
Types Of Financial Statements
Chapter 3 2 Why Do We Need A Financial Statement
Chapter 33 . Understanding Balance Sheets
Chapter 34 . What To Include In Balance Sheet Income Statements?
Prepare An Income Statement
Prepare A Balance Sheet
Tips To Prepare A Balance Sheet
Chapter 35 . Understanding The Income Statement
Why An Income Statement Is Important
Terms Used In Income Statements
Chapter 36.The Cash Flow Statement
Chapter 37.Bottom Line On Financial Statements
Chapter 38.Choose A Bookkeeping System
Single-Entry Bookkeeping
Double-Entry Bookkeeping
Chapter 39.Choose An Accounting Method: Cash Or Accrual
Cash-Based Accounting
Accrual Based Accounting
Chapter 40 . Organize And Store Your Documents
Understand The Importance Of Keeping Accurate Financial Records
Keep Track Of Profits And Expenditures
If You Are Not Ready – Outsource
Always Be On The Lookout For Business Apps
Maintain Accurate Documentation Of Inventory
Document Your Purchases
Do Not Overlook Account Reconciliation
Use Bookkeeping To Grow Your Business
Categorize Your Expenses
If You Outsource Your Accounts – Don't Be Hands-Off
Keep A Tab On The Receivables
Always Create Backup Archives For Bookkeeping Files
Self-Audit As Much As You Can
Keep Personal Transactions And Business Transactions Separate
Choose The Right Bookkeeping Software
Chapter 41 . Organize Potential Deduction
Chapter 42. Common Bookkeeping Pitfalls To Avoid
Chapter 43. Loan Payments
Chapter 44 . Inventory Count
Inventory Value
Inventory Buffers
Sprint Capacity
Chapter 45 . Bookkeeping Tips For Small And Medium Business
Plan For The Major Expenses
Track All The Expenses
Record The Deposits Correctly
Set Money For Your Taxes
Keep A Tab On The Invoices That You Have
Chapter 46. Bookeeping Tips For Large Scale Business
Chapter 47 . Why You Need The Knowledge Of Accounting
Know How To Run Your Business
Analyze Financial Reports
Decision Making In The Boardroom
Don’t Get Cheated
Specialize In Specific Areas In Bookkeeping And Accounting
Bookkeeping Increases Your Knowledge Of Business
You Are In Command Of Your Business
Conclusion
Chapter48 Introduction to Quickbooks
Chapter 49 Basic Fundamentals Principles Of Accounting
GAAP vs. IFRS
Accounting Principles
Chapter 50 What Are Accounting Principles?
The Definition of Accounting Principles
The Alternative Accounting Principles
Why Are Accounting Principles Needed?
Chapter 51 Essential Formulas Of Accounting You Must Know
Chapter 52 Small Business Bookkeeping Beginner’s Guide
Chapter 53 Why Your Business Require A Bookkeeping
Chapter 54 Setting Up Quickbooks
Chapter 55 HowBookkeepingWorks
Daily Tasks
Occasional Tasks
Housekeeping
Chapter 56 Preparing Financial Reports
How to Prepare Financial Statements
Customizing Reports
Budgeting with QuickBooks
Chapter 57 Single Entry Vs Double Entry Bookkeeping
Single-Entry Bookkeeping (Advantages and Disadvantages)
Double-Entry Method (Advantages and Disadvantages)
Chapter 58 Cash Vs Accrual
Cash-Based Accounting
Accrual Accounting
Chapter 59 Getting Money Back At Tax Time
Chapter 60 How To Find A Bookkeper
Chapter 61 What Is And How To Use Quickbooks
The Importance of Bookkeeping
What Small Businesses do with QuickBooks
158
162
Chapter 62 Quickbooks Features Pricing
Job Costing with Quickbooks Online
Chapter 63 Quickbooks Online
Chapter 64 Quickbooks Desktop
QuickBooks Online Self-Employed
QuickBooks Online Simple Start:
QuickBooks Online Essentials
QuickBooks Online Plus
QuickBooks Online Advanced
QuickBooks Desktop Pro, Pro Plus and Mac
QuickBooks Desktop Premier and Premier Plus
Chapter 65 Quickbooks Apps
Chapter 66 How To Choose The Best Quickbooks Version
Deciding on the best Software Package
Quickbooks Basic
Quickbooks Online Edition
Pro Vs. Premier Vs. Enterprise Solutions
Point of Sale Package
Chapter 67 Common Terms Used In Bookkeeping And Accounting
Chapter 68 The Best Things You Didn't Know Quickbooks Could Do
1. The Shipping Manager
2. The Feedback Button
3. Intuit Marketing Tools
4. The Loan Manager
5. Third-Party Solutions
6. Electronic Payments Sent Through QuickBooks
7. Customer Manager
8. QuickBooks Merchant Service along with Online Web store
9. Gift Cards
10. Paper Manager
11. Additional tip
Conclusion
Introduction
In order to have a successful business, basic accounting principles need
to be applied. Accounting is a basic business language, and is relied on
to deliver information to different users through financial statements. It
is the action or process of keeping financial records.
Financial Statements: Financial statements are a formal record of a
Company’s financial activities and position.
Accounting gives us the ability to see profit or loss for a given period. It
shows the value and nature of a firm’s assets, liabilities, and owner’s
equity. Employing a systematic method, accounting identifies measures,
classifies, verifies, records, summarizes, interprets and communicates
financial information.
Contrary to popular misunderstanding, accounting is not the same thing
as finance. While they are two parts of the same picture, there are some
key differences. Accounting is the documentation of financial
statements recording the day to day transactions of a business. Finance,
on the other hand, is the management of assets and liabilities,
responsible for decision making and managing cash flow.
There are two basic types of accounting methods. These are cash
accounting and accrual accounting.Cash Accounting: The method of
cash accounting means that you record income when cash is received
and expenses are recorded when
they are paid. This method is usually recommended for small businesses
and it shows a clear way to monitor profits and losses.
Accrual Accounting: When using the accrual method, you log transactions
as they occur even if the cash hasn’t changed hands yet. This method is
usually the choice for larger corporations. .
There are four basic types of information that is provided by an
accounting report, also known as a financial statement. All of this
information is important to know, and to understand.
1.
Cash Flow: This is the flow of cash coming in and out of
business activities including operating, investing, and financing.
2.
Results of Operations: This is the net income for a specific
period of time. This period of time can be a month, a quarter, a
year or any other specific time frame. Net income is the income
left after you have deducted all expenses from all income.
3. Financial Position: This will show a company’s assets,
Liabilities and capital.
a. Assets are the resources the company currently has;
b. Liabilities are the amount that is owed to third parties;
and
c. Capital is the money left over after all expenses have
been paid.
d.
e.
Solvency and liquidity: This is the ability to pay
obligations.
Solvency is the ability to pay obligations when they
are due; and
f.
Liquidity is the ability to meet short-term obligations.
Now that we have a grasp on what accounting is and what information
they provide to users, it is important to know who those users are. The
users fall into two classifications. Internal and external users.
Chapter 1 An Introduction To Accounting
Principles And Important Terminology
What are Accounting Principles?
The term “accounting principles” might sound odd - and downright
scary - to someone who isn’t involved in accounting in any way.
However, things are much simpler when you look in-depth and
understand that accounting principles have been adopted not because
someone wanted to terrify young entrepreneurs and beginner
accountants, but because they were needed.
In this chapter, we will go through the basic definition of accounting
principles, how they came to be, why they are needed, and the two
main groups of accounting principles: generally accepted accounting
principles (or GAAP) and the alternative accounting principles (a set
of accounting principles less common, but which might prove useful
under specific circumstances as you read through this book).
Without further ado, let’s dive in!
The Definition of Accounting Principles
The simplest way to define accounting principles is by calling them a “set
of rules created to govern the entire field of accounting”. In everyday
terms, accounting principles are the very foundation upon
which the more complex (and potentially more intriguing and
interesting) regulations created around accounting are built.
Mind you, accounting principles have not always been the same - they
were created along the way, as professionals in the field and regulators
discovered the need for such rules to be implemented.
In the United States of America today, generally accepted accounting
principles (GAAP) are strictly followed by everyone. Even more, if
you want your company to be part of the stock exchange, you need to
follow these basic rules to a T.
It is important to note that accounting principles are not the same all
around the world and that sometimes, the difference between the
regulations of one country and another might be staggering. In most
developed markets, the principles stay more or less the same, with
certain adjustments made to fit the economic and political landscape
of those specific countries. In developing markets, however, things
might be severely different - and this is why it is crucial that you hire
the services of a local accounting expert if you want to expand your
business to any other country on Earth.
The institution that deals with creating a uniform set of rules to govern
accounting at a global level is called IASB (International Accounting
Standards Board), but at the moment, there is no universally accepted
set of accounting principles the entire (or at least the vast majority)
world abides by.
Coming back home to the US, accounting principles here consist of
three main pillars: the basic accounting principles and guidelines (the
rules themselves), generally accepted industry practices (how the rules
are and should be applied in “real life”), and the detailed rules issued
by the FASB (Financial Accounting Standards Board) and by the
Accounting Principles Board (APB).
As mentioned in the beginning, accounting principles have not been
created and adopted to torment anyone trying to enter into this field of
expertise, but rather with the purpose of helping them. In short,
accounting principles help accountants and business owners achieve
the following:
Is useful to potential creditors, as well as potential
investors, so that they have the full picture of what
your business’ books look like, both from an
investment point of view and from that of the cash
receipts and economic resources;
As a resource to those who run the company to help
them make sane financial decisions - short term and
long-term alike;
Is used by those who run the company to help them
improve the way the business is performing;
Useful in maintaining clean, clear, and coherent records
of
The company’s financial state.
Generally Accepted Accounting Principles
If we look at accounting as a house, and consider accounting principles
as its foundation, then the generally accepted accounting principles are
pillars upon which the foundation is poured.
While not the only principles accountants abide by, GAAP are the
principles everyone should follow - especially if the company is public
and its financial records have to be available for potential investors,
creditors, and shareholders.
Generally accepted accounting principles are based on the following
goals:
1. The accountant has taken GAAP as the standard.
2. The same standards are to be applied throughout the entire
reporting process so that any kind of errors and
discrepancies are avoided.
3. If any standards are changed or updated, the accountant is
expected to disclose and explain the reasoning behind the
decision.
4. The accountant must be sincere in the depiction of the
business’ financial situation.
5. All the procedures used in financial reporting have to be
consistent in time.
6.
The accountant (and company) will not expect debt
compensation despite showing both positives and negatives
in their reports.
7.
Speculation should be eliminated and financial data
reporting should be fact-based.
8. All the report entries will be distributed across the right time
periods (e.g. revenue is to be divided by its relevant time
periods).
9. Full disclosure should be a goal of all financial reports.
10.
When reporting, the assumption is that the business will continue
to operate.
11.
The parties involved in transactions should remain honest.
In order to achieve the aforementioned goals, generally accepted
accounting principles have been split into twelve concepts: basic
assumptions (four of them), basic principles (four of them) and basic
constraints (five of them). They come as follows:
.
1.
Basic assumptions: Business Entity, Going Concern,
Monetary Unit, and Periodicity;
2.
Basic Principles: Historical Cost, Revenue Recognition,
Matching Principle, Full Disclosure Principle;
3.
Basic Constraints: Objectivity, Materiality, Consistency,
Conservatism, and Cost.
The Alternative Accounting Principles
While we do not aim to go in-depth with these, it is important to be
aware of their existence and of the fact that they are practiced as a
complement to generally accepted accounting principles.
Most large companies simply abide by generally accepted accounting
principles, as they are the most widely used and best understood rules
in the financial community. However, in some cases, generally
accepted accounting principles may be too broad or they simply may
be incompatible with how some businesses function. For instance, a
small business will find it difficult to follow the same guidelines as a
large business, and additional accounting principles may be used.
These complementary or additional principles are sometimes referred
to as alternative accounting principles.
Why Are Accounting Principles Needed?
To someone working outside of the accounting and entrepreneurship
field, accounting principles are but a set of regulations on paper.
To those who have already gained a little experience in accounting,
these principles are the guidelines to doing good work - work that is
consistent, work that is congruent, work that is relevant, and work that
is honest both to internal stakeholders and to external investors and
creditors.
The accounting principles are needed for one simple reason: there has
to be a set of rules that govern how accounting is done across different
industries, types of businesses and business purposes.
To help you understand the importance of accounting principles, think
of them as the rules by which all drivers and pedestrians move around
on the streets. Can you imagine a world without any kind of rules in
place?
Probably not.
It would be complete chaos - and there are places in the world where
traffic gets close to just that - complete anarchy. Picture this: everyone
crosses the street wherever they want, however they want to, cars do
not give each other priority when they should and they don’t give
pedestrians priority on crosswalks either.
Driving laws are more or less the same all around the world - with some
exceptions, which are well-known and aggressively announced from
the moment you step into those specific countries (e.g. the UK drives
on the left side of the road, but this is a very well-known fact and it is
announced on big banners everywhere, as soon as you enter the country
regardless of the means by which you do that).
In accounting and financial reporting, there are no set international
standards - but there are country-specific laws and regulations meant to
make the reporting uniform and easily understandable by everyone.
Not having accounting principles in place means not having a basic
understanding of how the traffic of financial reporting works. It means
navigating aimlessly, on your own terms - but even worse, it could
mean every business has the option of being unjust and dishonest with
their reporting. How would investors know which business is worthy of
their attention, then? How would stock markets themselves be able to
assess the value of a share?
At this point, you may wonder and ask: Yes, but generally accepted
accounting principles haven’t always been around.
Indeed, they haven’t. In fact, the group of standards and regulations we
now call GAAP has been set for little over a decade. They did exist
before that as well - but they consisted of exhaustive rules that allowed
for plenty of error (intentional or not), and they constantly needed to be
updated as soon as a new situation arose. Until 2002, when this problem
was brought forward by multiple institutions (including the US
Congress), accounting was ruled by fixed
regulations, rather than principles. The first accounting rules were set
by the American Institute of Certified Public Accountants in 1939
through the Committee on Accounting Procedures, and they were
subjected to the regulations of the US Securities and Exchange
Commission. Later on, in 1959, the Committee on Accounting
Procedures were replaced by the Accounting Principles Board, and in
1973, this became the Financial Accounting Standards Board. To date,
they are the ones overseeing generally accepted accounting principles.
They were not always seen in a good light by both investors and the
accounting community, though, not because their rules were too strict,
but for the exact opposite. Until 2002, FASB oversaw a set of rules that
were too ambiguous in terms of what should and shouldn’t be done.
This allowed accountants and audit professionals to find ways to
circumvent them and to create new situations that were not stipulated in
the set of rules the FASB enforced.
The entire situation generated a lot of turmoil in the financial world. In
2002, several famous cases brought the FASB system to the attention of
the public and the US Congress. In the wake of several huge scandals
(such as the one where Enron and the Arthur Andersen Firm were the
main actors), equity holders in the US realized one very dangerous fact
- they could not trust audit firms, and this needed to change.
We will not dive deeper into the Enron scandal, but the point we’re trying to
make is that it was one of the first moments that pushed for the creation of
generally accepted accounting principles as they are known today. The
loopholes and weaknesses of the previous system were aggressively
exploited by Enron's auditors to mask the tremendous amount of debt the
company was in. It was high time that this drove a change for a principlebased accounting standard.
And it did. While far from perfect (and still debated), generally accepted
accounting principles are, thus far, a better and more comprehensive way of
standardizing the industry’s guidelines.
Generally accepted accounting principles are needed, and they should be
followed. While some of them might be connected to actual US legislation,
most of them are authoritative best practices (at their best). However, as the
vast majority of companies abide by these rules (or, to be more precise,
principles); it is important to do the same because it creates a sense of
trustworthiness and coherence between businesses, creditors, and investors
alike.
As for the progress on delivering an international set of principles for
accountants, it is still slow and steady - but with globalization becoming
increasingly real and with trades being made across borders every day, this
international set of principles is getting closer by the minute.
At the moment, the main hinge in the development of an internationallyaccepted set of principles lies in, well, methodology. The International
Financial Reporting Standards (IFRS) are more of a set of principles,
whereas GAAP are a set of rules. The first ones make it easier for
accountants to mold business reporting on the given set of principles but
allow for misinterpretation and intentional mistakes. The latter ones,
however, are strict and, at times, they make it difficult for businesses to
mold financials to suit their needs.
It is an exhibition of what they are, why they are needed, and how they
work in real life. Hopefully, the information presented below will help you
understand why accounting works the way it does and why a set of
principles to abide by is actually necessary in the context of businesses
interacting with each other every day.
Chapter 2 An Introduction To Accounting
Methods And Statements
An accounting method is a process that a business uses when reporting
their income and expenses. In the United States, the two methods of
accounting accepted by the Internal Revenue Service (IRS) are cash
accounting and accrual accounting. Most people use the cash method of
accounting when recording expenses. It is also the method most
commonly used by small businesses. According to the regulations of
the IRS, businesses that have over $5 million in sales annually are
required to use the accrual accounting method. When a business is
especially large, the accrual method offers a more accurate portrayal of
their finances. These methods are used whenever a company completes
its accounting statements. Each accounting statement offers insight into
a business’ financial stability, cash flow, sales and expenses, and other
information over a given time period.
Cash Accounting Method
The cash basis of accounting is the simpler of the two methods.
Revenues and expenditures are recorded when received and sent,
rather than anticipating when they will be received and sent. This is
straightforward and less confusing, especially for smaller businesses
that may not have as much revenue and who do not retain large
amounts of inventory. When people are writing a balance sheet or
considering personal finances, they often compare their current
amounts of cash in hand to the debts that they currently owe, rather
than looking to the future.
Even though the cash accounting method is easier for small businesses
to use, it is not the preferred method of the IRS for larger companies.
This is because it is easy to alter payments when using the cash basis
method of accounting. For example, a company might alter its revenue
by receiving a check from a customer and holding onto it until the next
fiscal year to avoid paying taxes on the amount. A company might also
pay suppliers early so they can recognize more expense in the current
year, which would also reduce the amount of taxable income. These are
unethical behaviors that are strictly prohibited by the IRS, however, it is
difficult to detect this type of behavior.
This does not mean that all delaying of reporting is unethical. For
example, it is not uncommon for businesses to have a spike in sales
during the holiday season. Some companies may not recognize the sales
until the following fiscal year, especially if the cash receipts for credit
card payments and checks will not be processed in time to be added to
the current year’s financial reports.
As it is easy to misconstrue financial information using the cash
accounting method, there are limits on the people and businesses
allowed to use it. Tax shelters and C corporations are prohibited from
using the cash method. However, entities that have less than
$25,000,000 in gross receipts for the last three tax years can use this
method. Businesses that provide a personal service and receive at least
95% of their revenues related to their provided services may also use
the cash method.
How to Use the Cash Accounting Method
The two most common statements for businesses using the cash accounting
method are the income statement and the balance sheet. The income
statement is produced monthly and it details all activity within that
accounting period. For example, a graphic designer might complete work
for a company on their website at the end of June. They would record any
resources used and their time in the current month of June when they
complete the work. However, if the client does not pay until August, then
they would not record the payment for services until August.
The balance sheet of a company using the cash method will not show
accounts payable or accounts receivable, as they do not calculate future
revenues and expenditures. It also does not report information on inventory
or work that is done in the current period, unless the customer pays for the
work in the same period.
When creating a cash basis income statement, it is important that it is
distinguishable from an accrual basis statement, particularly because the
changes are vastly different and the way a statement is prepared effects the
way it can be interpreted. Most companies using this method change their
heading for statements. For example, the might write their company name,
go down a line and write “Cash Basis Income Statement” and then go
down another line and write ‘for the month ended (date)’. Additionally,
rather than labeling the results of the income statement as ‘net income’, it
should be labeled as ‘cash basis net income’.
The reason for this is that the net income of companies using cash basis
accounting can change drastically from one month to the next.We will focus
on the accrual basis system of accounting. As cash basis accounting is not
as closely regulated as accrual basis accounting, it is easier for results to be
misconstrued and misinterpreted. Sometimes, companies that use cash basis
accounting for their books may create internal reports using accrual basis
accounting.. This helps make more informed decisions about the business,
as it can be difficult to interpret a cash-basis statement, especially by
companies that enter service contracts or get prepaid for services.
To make information relevant to accrual basis account, the revenue and
expenses must be adjusted. For the revenue account, the following
adjustments should be made:
●
Receivables from customers that have paid bills should be subtracted
●
Cash deposits for which the service or good has not been provided
should be subtracted
●
Bills that have been invoiced for work done in the period should be
added
●
Products/services that have been earned but not paid for should be
added
To adjust the expenses for accrual basis accounting, the following
changes should be made:
●
Payments for expenses of a previous period should be subtracted
●
Deposits for expenses that have not yet been paid should be
subtracted
●
Accumulated expenses that have not yet been invoiced by
suppliers should be added
●
●
Supplier invoices for the present period should be added
Amortization, depreciation expense, and other non-cash expenses
should be added
When a cash basis company undergoes an audit, they often must
prepare their statements in this way. Auditors will not certify income
statements that have been prepared according to cash accounting.
Accrual Accounting Method
The accrual method of accounting reports income and expenses when
they are earned and incurred, rather than waiting until debts are paid.
The biggest problem with the accrual method of accounting is that
companies must make estimates. One of the biggest differences is the
recognition that not all customers will pay the debt on time, in full, or at
all. For this reason, companies that use the accrual method of
accounting also have an account recorded as a bad debt expense.Once a
business generates a lot of sales, accrual accounting gives stockholders,
investors, and creditors a better idea of how well the
company is performing financially. It works well for companies that have
lengthy contracts as well since there might not be as clear of a picture with
the cash method of accounting.
Let’s use a construction company as an example. Usually, construction
companies receive at least a partial payment up front to help cover labor
costs and the costs of materials. Rather than waiting to list additional
revenue, they would list the percentage of the project complete at the time
of the statement and its value, including income from the estimated
payment of that percentage of the project and expenses from estimated
materials and cost of labor for that portion of the project. This is spanned
across the entire project, so there is an accurate reflection of cash inflows
and outflows through the project.
If a cash method of accounting is used, the construction company might
recognize a project when they schedule it. However, by recognizing
revenue in the first month, their incoming revenue is going to show
significantly less for the months they are working on that project. This
would make it hard to attract investors or find loans if necessary during this
time because the company looks like it does not have any revenue coming
in.
Chapter 3 :GAAP CONCEPTS
AND
ASSUMPTIONS
GAAP оr Gеnеrаllу Aссерtеd Aссоunting Prinсiрlеѕ rеfеrѕ tо rulеѕ аnd
parameters ѕеt bу thе Aссоunting Practices Bоаrd оf thе Amеriсаn Inѕtitutе
of Certified Public Accountants. GAAP аlѕо includes certain еѕtаbliѕhеd
wауѕ оf ассоunting, whiсh mау оr mау nоt hаvе bееn ѕеt bу аnу аuthоritу.
GAAP аrе gеnеrаllу accepted Wеѕtеrn ѕtаndаrdѕ оf ассоunting аnd
reporting, used in thе U.S. and сеrtаin оthеr соuntriеѕ. From Engliѕh Gеnеrаl Accepted Aссоunting Prinсiрlеѕ (GAAP). GAAP ѕtаndаrdѕ
regulate ассоunting trеаtmеnt оf сеrtаin practical situations in dеtаil.
Gеnеrаllу Accepted Aссоunting principles developed in thе U.S. fоr
indереndеnt ассоunting firms in an аttеmрt to еliminаtе inconsistency in
accounting fоr рrivаtе соmраniеѕ and соrроrаtiоnѕ.
Intеrnаtiоnаl system of accounting rерrеѕеntѕ widеlу uѕеd accounting
ѕtаndаrdѕ dеvеlореd bу thе Council оf Finаnсiаl Aссоunting Stаndаrdѕ
Bоаrd. Thеу аrе uѕеd to standardize finаnсiаl accounting оf jоint-ѕtосk
companies. Cоmmоn ассоunting рrinсiрlеѕ (оr GAAP) аrе "bаѕiс rulеѕ" оf
finаnсiаl rероrting. These principles provide gеnеrаl frаmеwоrk that dеfinеѕ
infоrmаtiоn tо bе included in thе rероrt аnd thе wау thiѕ infоrmаtiоn ѕhоuld
be рrеѕеntеd. Phrаѕе "gеnеrаllу accepted accounting рrinсiрlеѕ" inсludеѕ
basic оbjесtivеѕ оf financial report, a number оf соnсерtѕ аnd a ѕеt of
detailed rulеѕ.
It must bе еmрhаѕizеd thеrе iѕ nо соmрlеtе list of generally accepted
accounting рrinсiрlеѕ. In fасt, new ассоunting рrinсiрlеѕ арреаr
соntinuоuѕlу, as firmѕ еngаgе in nеw forms оf business асtivitу.
GAAP ѕtаndаrdѕ:
GAAP are bаѕеd оn a much larger numbеr of dеvеlорmеntѕ. Thеrеfоrе,
Amеriсаn standards show a tendency tо сlеаrеr regulation of all operations
аnd lеѕѕ flexibility fоr individuаl company. The U.S. Bоаrd оf Financial
Rероrting Stаndаrdѕ ѕignеd an аgrееmеnt with thе Committee on
Intеrnаtiоnаl Finаnсiаl Reporting Stаndаrdѕ to еliminаtе differences
between U.S. and international rероrting systems. U.S. standards аrе uѕеd
bу mаnу foreign соmраniеѕ tо еntеr thе U.S. market.
Aim оf GAAP:
GAAP aims toward mаking thе ассоunting рrосеdurе trаnѕраrеnt and make
it еаѕiеr fоr invеѕtоrѕ аnd сrеditоrѕ tо get infоrmаtiоn. Here are ѕоmе of thе
goals of GAAP.
1) Tо make infоrmаtiоn available tо invеѕtоrѕ аnd lеndеrѕ ѕо thеу саn make
ѕоund dесiѕiоnѕ rеgаrding lоаnѕ and investments.
2) Tо make infоrmаtiоn аvаilаblе аbоut rеѕоurсеѕ, funds, and finаnсеѕ.
3) Tо hеlр invеѕtоrѕ аnd lеndеrѕ аѕѕеѕѕ thе viаbilitу of an invеѕtmеnt оr a
lоаn.
Prinсiрlеѕ bеhind GAAP:
Thiѕ ѕесtiоn diѕсuѕѕеѕ ѕоmе оf thе principles bеhind GAAP.
1) Hiѕtоriсаl Cost Prinсiрlе: Cоmраniеѕ ѕhоuld make finаnсiаl statements
bаѕеd оn соѕtѕ rеlаtеd tо асԛuiѕitiоn оf аѕѕеtѕ аnd nоt fair mаrkеt value.
Thiѕ removes аnу confusion rеgаrding vаluе оf liаbilitiеѕ.
2) Rеvеnuе Rесоgnitiоn Principle: Thе finаnсiаl statement must state
whеthеr rеvеnuе iѕ rеаlizеd оr еаrnеd.
3) Full Disclosure Principle: The еxtеnt оf infоrmаtiоn diѕсlоѕurе iѕ bаѕеd
оn analysis оf tradeoff.
4) Mаtсhing Prinсiрlе: Exреnѕеѕ have tо bе рrороrtiоnаtе to revenues.
GAAP Suрроѕitiоnѕ:
In оrdеr to mаkе GAAP imрlеmеntаtiоn еffесtivе, hеrе аrе a fеw bаѕiс
аѕѕumрtiоnѕ rеgаrding the rules.
1) Going Cоnсеrn Assumption: Thе buѕinеѕѕ iѕ long term.
2) Eсоnоmiс Entitу Aѕѕumрtiоn: Buѕinеѕѕ iѕ аn independent еntitу аnd hаѕ
an idеntitу diffеrеnt from itѕ оwnеr.
3) Mоnеtаrу Unit Assumption: Thе monetary сurrеnсу thаt iѕ gоing to bе
used fоr rесоrding financial statements will be thе ѕtаblе currency.
4) Pеriоdiс Rероrting Aѕѕumрtiоn: Buѕinеѕѕ ореrаtiоnѕ аrе to be regularly
reported, аnd thеrе will bе a regular gap bеtwееn rероrtѕ.
GAAP Limits:
GAAP рutѕ some limitѕ оn financial rероrting.
1) Thе аdvаntаgеѕ оf finаnсiаl reporting nееd tо bе соnѕidеrеd аlоng with
соѕt оf giving thе infоrmаtiоn.
2) The procedures nееd tо ѕсruрulоuѕlу follow GAAP рrасtiсеѕ.
3) Givеn two financial rероrtѕ, the most ассurаtе one should be selected.
In addition to thе above principles аnd соnvеntiоnѕ, thе finаnсiаl statement
nееdѕ tо bе rеlеvаnt and rеliаblе, ѕinсе investors and lenders will mаkе
dесiѕiоnѕ bаѕеd on it. Thе rероrt should fоllоw prescribed nоrmѕ ѕо that
rероrtѕ of diffеrеnt businesses саn be соmраrеd. Rероrting ѕhоuld bе
соnѕiѕtеnt, and thе ассоunting mеthоd ѕhоuld nоt vary tоо much over timе.
GAAP helps finаnсiаl reports асhiеvе all оf thе аbоvе and рrеvеntѕ
financial miѕrерrеѕеntаtiоn.
GAAP VERSUS NON-GAAP
Generally Aссерtеd Accounting Principles, or GAAP, аlѕо known as
Accounting Standards, iѕ a tеrm used to dеѕсribе a standard frаmеwоrk оf
guidеlinеѕ thаt ассоuntаntѕ fоllоw whеn recording trаnѕасtiоnѕ and
рrераring financial statements. Mаnу companies аnd finаnсiаl аnаlуѕtѕ uѕе
non-GAAP measures аѕ wеll, аnd mоѕt оf thе timе it mаkеѕ thе numbеrѕ
lооk better. Bеttеr numbеrѕ fоr a рrеѕѕ rеlеаѕе is nоt thе оnlу аdvаntаgе tо
non-GAAP figures; hоwеvеr, financial аnаlуѕtѕ also uѕе thеm as a bеttеr
wау tо gаugе thе growth оf a company in rеlаtiоn to itѕ рееrѕ.
If you want to get thе GAAP numbеrѕ, juѕt gо tо thе соmраnу'ѕ mоѕt rесеnt
ԛuаrtеrlу or аnnuаl filing and look аt thе income ѕtаtеmеnt. If уоu wаnt tо
ѕее thе non-GAAP mеаѕurеѕ, уоu саn аlѕо find thеm in the ԛuаrtеrlу оr
annual rероrt, as well as in рrеѕѕ releases, аnd in hiѕtоriс аnd futurе
еаrningѕ рrоjесtiоnѕ. Mоѕt оf thе timе, whеn earnings реr ѕhаrе аrе
mеntiоnеd, thеу аrе ԛuаlifiеd as еithеr GAAP, nоn-GAAP or ѕоmеthing
еlѕе, but ѕоmеtimеѕ they are nоt рrореrlу qualified. Yоu'll аlѕо nееd tо
ascertain whеthеr or not you are dealing with еаrningѕ per ѕhаrе оn a bаѕiс
lеvеl, оr a fullу dilutеd lеvеl. Thiѕ саn also bе fоund in thе company's
inсоmе statement.
Whаt еxасtlу iѕ ѕtriрреd out in nоn-GAAP numbеrѕ mау vаrу a littlе bit
frоm induѕtrу to induѕtrу, but generally we find things like amortization оf
intangibles, ѕhаrе-bаѕеd соmреnѕаtiоn expense, restructuring сhаrgеѕ,
senior dеbt amendment fееѕ аnd gain (loss) оn еxtinguiѕhmеnt оf debt, etc.
еtс. It iѕ important tо note that аll оf these еxреnѕеѕ are vеrу mаtеriаl tо thе
futurе ѕuссеѕѕ оf the соmраnу; аnаlуѕtѕ juѕt like tо use nоn-GAAP numbеrѕ
to bе аblе tо judge thе core grоwth рrоѕресtѕ a little bеttеr. Company
mаnаgеmеnt аlѕо uѕеѕ nоn-GAAP figurеѕ to understand, mаnаgе, and
еvаluаtе thе соmраnу'ѕ buѕinеѕѕ rеѕultѕ and mаkе operating dесiѕiоnѕ.
Cоmраniеѕ оftеn mаkе dесiѕiоnѕ regarding staffing, futurе mаnаgеmеnt
рriоritiеѕ and hоw thе company will direct future ореrаting еxреnѕеѕ аnd so
fоrth bаѕеd on non-GAPP mеаѕurеѕ.
Despite non-GAAP rеѕultѕ аlѕо being gеnеrаllу ассерtеd, we muѕt tаkе thе
time tо еxаminе what thе differences are, and if thеrе are any red flаgѕ
hiddеn. Are nоn-GAPP earnings сlimbing оr ѕinking with a dirесt
rеlаtiоnѕhiр tо GAAP еаrningѕ, оr is there a discrepancy? Iѕ thе company
spending tоо muсh оn rеѕtruсturing сhаrgеѕ or finаnсing еxреnѕеѕ in
rеlаtiоn tо thеir nоn-GAPP rеѕultѕ? Whаt iѕ thе соmраnу'ѕ hiѕtоrу of thе
diffеrеnсе between GAAP аnd nоn-GAAP lооk like in rеlаtiоn tо itѕ
соmреtitоrѕ? All оf thеѕе questions аrе wоrth аѕking, еѕресiаllу whеn
looking at роtеntiаl value аnd growth plays.
If thе соmраnу uѕеѕ nоn-GAAP figures, thеу will gеnеrаllу inсludе a tаblе
оr ѕоmе оthеr еаѕilу соmраrаblе rесоnсiliаtiоn rеviеw еithеr in the
quarterly оr annual rероrt or in a ѕuррlеmеntаl press release. Thiѕ iѕ uѕuаllу
аn easy wау tо ѕее a ѕummаrу оf thе diffеrеnсеѕ bеtwееn GAAP аnd nоnGAAP on a top linе, bоttоm linе, mаrgin аnd per ѕhаrе bаѕiѕ.
UNDERSTANDING THE FOUR BASIC GAAP
PRINCIPLES
GAAP аnd thе еvеr-сhаnging, оftеn-соnfuѕing world оf accounting
ѕtаndаrdѕ аrе important fоr buѕinеѕѕ оwnеrѕ tо undеrѕtаnd. When уоu hire a
virtual bookkeeper аnd part-time financial controller, thе burdеn of
undеrѕtаnding аll thе nuances of GAAP ассоunting standards falls off уоur
shoulders. (Aftеr all, we know уоu hаvе еnоugh tо wоrrу about.)
But, undеrѕtаnding thе imроrtаnсе оf GAAP iѕ сritiсаl in hiring thе right
virtuаl bооkkеереr аnd also in being able tо recognize if ѕоmеthing is nоt
right with your bооkѕ if you аrе using аn in-hоuѕе bооkkеерing ѕtаff.
Accountants ѕреnd уеаrѕ ѕtudуing, memorizing and lеаrning GAAP
ѕtаndаrdѕ. Wе are ѕееking tо give уоu ѕоmе оf thе basics ѕо thаt you will bе
аblе to rесоgnizе if your оn-ѕtаff bооkkеереr is nоt adhering tо GAAP
standards, аnd уоu will understand thе imроrtаnсе оf GAAP if уоu'rе
shopping fоr a virtual bооkkеереr. If уоur bооkkеереr follows just the fоur
basic GAAP рrinсiрlеѕ, уоu саn bе reasonably аѕѕurеd оf accurate
bооkkеерing, which саn lead to bеttеr finаnсiаl dесiѕiоnѕ fоr уоur соmраnу.
Fоur Bаѕiс GAAP Aссоunting Principles:
Cоѕt principle - All values ѕhоuld bе listed аt thе рriсе раid, nоt market
vаluе for more accurate records
Revenue principle - A mаin tеnеt оf accrual-based accounting, the rеvеnuе
рrinсiрlе ѕtаtеѕ thаt rеvеnuе muѕt bе rероrtеd whеn it iѕ еаrnеd, nоt whеn it
iѕ rесеivеd
Mаtсhing principle - Onе of the bаѕiс rulеѕ оf ассurаtе ассоunting,
еxреnѕеѕ muѕt bе matched with revenue in bаlаnсе sheets. The еxреnѕе iѕ
included whеn thе рrоduсt iѕ purchased.
Diѕсlоѕurе рrinсiрlе - Thiѕ assures the соmрlеtеnеѕѕ of a соmраnу'ѕ
finаnсiаl ѕtаtеmеntѕ, bу mandating thаt all rеlеvаnt infоrmаtiоn to make
ѕоund financial forecasts аnd judgments about a соmраnу'ѕ finаnсеѕ must
be inсludеd in thе finаnсiаl ѕtаtеmеntѕ, аѕ long аѕ thе cost to obtain thаt
information is rеаѕоnаblе.
Chapter 5 Detecting And Preventing Fraud
Digital Fraud
Digital fraud is fraud that is accomplished by stealing information or
by hacking into computer resources that are assumed to be secure. It’s
one of the most common forms of fraud and, unfortunately, it usually
could have been prevented if the victim had exercised a bit more
diligence in how they attended to their digital security. Digital fraud
includes:
Hacking
Phishing
Packet Sniffing
Networks
Stealing Email
Stealing Work or Home Computer Credentials
In many cases, information that is stolen digitally will also be used
digitally. For instance, if someone steals your credit card number with
a phishing scam, they’ll likely use that credit card info online to
commit further acts of fraud; oftentimes, they’ll make expensive
online purchases with the information.
Paper Fraud
Unfortunately, quite a few people seem to have forgotten about the
risks of paper fraud. Your bank statements, personal letters and other
information that you toss out in the garbage is a huge source of
information to potential fraudsters. If you’re like many people and, at
least to some extent, run a business from your home, you have to be
even more cautious. One other thing to keep in mind is the fact that,
once it’s out on the curb, your garbage is actually not protected by
your right to privacy anymore. Dumpster diving and tipping over
garbage cans can give fraudsters access to a huge amount of
information that they can use to take advantage of you. Consider the
following items that you probably throw away without thinking about
it.
Bank statements
School records
Credit card statements
Utility Bills
Hospital and other medical bills
People committing fraud aren’t looking for one particular piece of
information; they’re looking for several from which they can construct
a whole identity that they can exploit. If they had information about
you such as that listed above, for example, they would know:
Where you bank
Where you go to school
What kind of credit card you have
How much you pay in utilities every month and your
physical address
What kinds of medical conditions you suffer
This is plenty of information for anyone intent on committing an act of
fraud. People who commit fraud will oftentimes piece together
information that they glean from a variety of sources and use that to
access more of your personal information or, if they can, to get at your
money or your credit card numbers. As the statistics from the CSN
demonstrate, most people who are the victims of fraud end up paying
some financial price for it.
We’ll discuss how you can protect yourself against fraud with some
simple safety measures. There are most certainly sharks in the water
and, to avoid attracting them, you have to know what they’re looking
for.
Compartmentalizing Personal Information
Compartmentalizing information means separating information in a way
that ensures that someone who knows one piece of information about you
cannot figure out other pieces of information about you. In the sense of
protecting yourself from digital fraud, it means making sure that you’re
digital self is not so predictable that a skilled fraudster could get into
everything you own by exploiting their knowledge of one part of your
digital life.
The best example of how someone bent on defrauding you could do this is,
again, centered on passwords. One of the things you want to make sure you
never do is use the same password for multiple sites. By separating your
digital identities on every site in this regard, you ensure that someone who
gets your social media password, for example, cannot use that as a tool to
figure out your bank password. Likewise, keep personal information online
to a minimum. Your bank will have your address and other personal
information, but there’s no reason that this has to be reproduced on your
social networking profile. By keeping the information that you provide on
any given site to a minimum, you can reduce the chances that anyone will
be able to combine your information from several different sites and gain
access to information you want kept private.
Remember to keep your business and personal computer use separate, if
possible. If you have a home business or if you work at home for your job,
see about buying a computer exclusively for work. You’ll find that’s a lot
less stressful to have information that applies to work and information that
is personal separate than it is to mingle the two.
There isn’t much attention given in the media to the subject of paper
security. It’s still vital, and various acts of paper fraud constitute a huge
percentage of the total cases of fraud every year. According to industry
reports, check fraud and other types of fraud are on the decline, but they’re
still very big problems. Even though digital information transmission is
rapidly replacing paper methods, there is still very good reason to be
concerned about the security of any paper documents you have in your
home or office. Here are some tips to help you make sure you’re as secure
as possible.
Shredding Documents
If you’re old enough to remember, shredding documents used to be a
constant task in offices. Today, most of the office communications that are
sent for business are sent electronically. This has made people a bit less
diligent about how they handle documents in an office setting and because
the same change has occurred for everyday people many people don’t
even have a paper shredder in their homes. You need one and here’s why.
When you take your trash and throw it in a dumpster or take it to the curb,
it’s no longer yours. Anyone can come by and go through it. If you’re
wondering why people would bother doing this, go back to the paper
shredder. All of those bank statements, credit card statements, personal
records and the rest of it that people throw away these days tend to be
intact and, for a fraudster, that’s very useful, indeed. Much as
compartmentalizing information can keep anyone from having access to
too much, putting a wealth of personal information into one garbage bag
and throwing it out invites disaster.You can pick up paper shredders that
go on top of a garbage can for under $50 at most any discount store;
oftentimes, they’re under $30. These devices can give you a lot of peace
of mind. It’s best to shred
anything you’re throwing out so that you don’t miss anything when
you’re sorting through shred/no shred piles. Just shred it all. You can
recycle shredded paper or you can even use it for some other purposes,
such as protecting your belongings by padding boxes with shredded
paper when you move or when you put things in storage.
Home Safes
You should consider getting a home safe. There are many different
types of safes out there and even apartment-dwellers can find suitable
models that don’t require you to modify the structure of your living
space.Home safes have many benefits to them. They protect vital
documents against fire and flood damage, which is great for items such
as your car title, birth certificate, social security card, and so forth. They
also protect your information against theft.
The most secure home safes are those that are mounted to the floor or
into a wall. These are almost impossible to remove without a full crew
of people to do the job. Most burglars are not going to bother trying to
get one of these out of your home.
Some safes aren’t mounted to the floor or wall. These are, of course,
less secure than safes that are mounted, but they’re still a huge
improvement from a locking file cabinet. These safes can be stashed in
the back of a closet or anywhere else that’s convenient. They’re very
heavy, so it’s hard for burglars to take off with them. Most burglars
won’t bother, as they’re not likely to be able to get the safe open, even
if they do abscond with it.
Place anything you wouldn’t want someone to get access to into your
safe. Aside from valuables, you may also want to put financial
documents, tax records and so forth in a safe. You’ll always know
where those documents are and they’ll be almost completely
inaccessible to anyone trying to steal them from you.
Safeguarding Personal Information
Your Social Security number, driver’s license number, address, credit
card numbers are only some examples of the very useful information
to fraudsters that you’ll typically own in physical form. This
information needs to be treated in a way that keeps it safe, and that
starts with handling it correctly. Here are some basic tips to follow:
There’s no reason to have your Social Security card in
your
wallet
Your passport should be at home unless you’re using it
Keep credit cards behind the other cards in your
wallet so
people can’t get the numbers when you pay for something
Never set a credit card or debit card down on an ATM
or a cashier’s counter while paying. Keep it in your
hand at all times.
Remember that fraudsters are very good at
memorizing numbers, so any numbers that you flash in front of them
are likely to be exploited!
ATMs
There are two major threats at ATMs: other people and skimmers.
Dealing with other people just means exercising basic street smarts.
Look around you before you use any ATM to make sure that the area
is safe. Cover your hand while you’re entering your PIN and take your
receipt. When your cash is dispensed, take it out of the machine and
put it in your pocket right away. Don’t take out your whole wallet and
stand there for a length of time putting it away. You can do that later
and without exposing the contents of your wallet to anyone
looking.Skimmers are devices that are attached to ATM machines and
sometimes to credit card payment machines. They’re devices that skim
your card number when you slide it and, of course, your PIN when
you enter it. Look at a machine carefully before you use it. Check to
see if the card reader is actually a part of the machine or if it’s been
added to the front of the real reader. It’s easy to tell if you pay
attention, but most people don’t. If anything seems off about an ATM
machine, don’t use it. This same advice applies to credit card payment
machines, such as those you see on gas pumps. Tug lightly on the
machine to make sure that none of the components are loose and,
therefore, likely ones that were added on by someone intent on
defrauding people of their money by stealing their PIN and their card
numbers.
Paper fraud is as dangerous as electronic fraud, so be prepared to deal
with the consequences if you’re not vigilant.
Now that you know the major types of threats out there, you’re prepared
to start developing a strategy to deal with them. It starts with maintaining
awareness. Maintaining awareness shouldn’t take all the fun out of life. In
fact, being aware can help you make life much more fun by providing you
with some peace of mind!
Being Vigilant
When you’re reading the news, be sure to take the time to read the
tech section of whatever news sources you enjoy. They’ll usually give
you good information about the latest threats out there. If a new virus
or other piece of malware shows up in the world, be sure you check
your computers and smartphones to make sure you’re protected
against it.
Where smartphones and laptops are concerned, be wary of using
them on public networks. Remember that any passwords or other
information you transmit may be intercepted. If you have a 3G or 4G
phone, it’s safer to check your email and do other secure work over that
connection than it is to do it over a wireless LAN. Turn off your wireless
networking function on your phone when you’re not at home to make sure
that your phone isn’t hooking up to random networks.If you can, use wired
connections instead of wireless connections. Having an open wireless
network in your home can cause real trouble for you and, in many ways it’s
much safer to use CAT-5 cable than to use a wireless LAN.
Check Your Credit Report
You can get a free credit report from the three major reporting agencies
once per year. Be sure you do so. There are also services that allow you
to subscribe to your credit report. If you have excellent credit, you’re a
more appealing target for fraudsters. They can get a lot of mileage—
meaning money—out of your identity before people will catch on.
You’ll have to keep an eye on activity on your accounts to make sure
you’re info isn’t being used for fraud.
Stopping Opportunities for Fraudsters
Be sensible about what you do and you’ll cut off many different
opportunities for fraudsters. If someone calls asking for your credit
card number, PIN or password, it’s always fraud. Just hang up.
There’s no need to talk to them to make this determination. A
financial institution that needs to speak with you will never ask for
your PIN. A website will never ask for your password. The only
people who ever need your credit card number are people from
whom you’re purchasing right at that minute.If you can avoid doing
so, never save your credit card information with any online or overthe-phone service. It only takes a few minutes to enter it when you
make a purchase and hackers consider the databases that companies
have of people’s credit card numbers to be very appealing targets.
There have been instances where they’ve gotten into them already,
so do thing the old-fashioned way and don’t let convenience make
you a target!
The less personal information you get in the mail the better. If your
bank offers an online statement option, take it. That way, you don’t
have to deal with the paper version. Shred anything with your name on
it that you get in the mail before you throw it away.
Chapter 6 The N1 TaxManagement
Strategy To Save Money
Companies have the chance to reduce the amount of taxes that they
have to pay towards the IRS. In this chapter, we will look at the
different things that you can do to reduce how much tax you pay.
Choose the right type of business
First off, start by picking the right term to fit your business into. That
is, be sure whether you want to be a sole proprietor or an LLC. You
have to pick the right one in order to pay the right tax. Don’t be under
the impression that you can choose whatever you think sounds good.
You have to pick something that will help you avail tax benefits. For
example, a sole proprietor can take advantage of many deductions
while filing for taxes whereas members of an LLC will not be held
personally liable to any debts that the company owes.
Work opportunity tax credit
Work opportunity tax credit refers to a tax deduction that you can avail
for hiring a war veteran or someone that has faced significant
difficulties in finding a job to suit their cadre. You can show the IRS
their employment letter and also the salary that you pay them. The
amount paid will be deducted from your tax. There is a limit to how
many you can employ or use as a means to reduce your company’s
tax.
Retirement benefits
You can offer retirement benefits to your employees which will help
you save on taxes. You must choose the best plans that suit your
business. Retirement benefits can range from providing a monthly
pension to paying monthly bills that your employees might incur after
they retire. So, you have to choose the best plans and help save on a
large amount of taxes that you might have to pay to the IRS.
Unify
If you have a slew of companies, then you can consider bringing all of
them under a single roof, as that will help you pay a unique tax. You
don’t have to worry about filing different papers for each individual
company. You can file for just one and be done with it in no time at
all. You can in fact, offset the losses of a company with the profits of
another. You can also increase the number of deductions that you
make. Doing so will greatly help you remain with a large profit at the
end and might not have to pay up as many taxes.
Independent contractors
There is an advantage to employing independent contractors as opposed to
employees. If you are running a business or company, then you can
consider employing independent contractors, as they will help you avoid
paying payroll taxes. This is great for all those small business that are
looking to capitalize on small profits. You can also employ freelancers if
you like.
Hiring family
It is a good idea for you to employ your children and family members
to work for you. Doing so will help you avoid paying them an
allowance and you can deduct their salaries from your tax returns. It
need not always be your kith and kin and can be cousins, aunts, uncles
etc. This is especially beneficial for sole proprietors. They will not owe
any social security or Medicare taxes on their children’s salaries, which
will prove to be quite advantageous.
Write off assets twice
Better known as a gift lease back, you can write off an asset like a
vehicle twice. Like a vehicle that you use for your business, which is
fully depreciated. Its market value stands at $15,000. You decide to
lease it out to your spouse for $500 a month. You can then avail a
benefit of
$6,000, which can be deducted from your taxation.
Travel/ medical expenses
You can take advantage of travel and medical expenses
reimbursements. And it is not just yours that you can reimburse, you
can reimburse your business partner’s, spouses, children’s, dependent’s
etc. You can produce appropriate receipts and avail the deductions.
Renting your house
If you own a house, then you can rent it out to an S corporation and
earn tax-free income from it. You can rent it out to a company for
about 14 days a month to conduct meetings and seminars etc. and not
declare it. But remember there is a limit to how many people can
occupy it at any given point in time. Also, you have to specify to the
company that there can be no entertainment provided during the
meetings. If you own an S corporation then you can use your house for
meetings and deduct rent to yourself from company accounts.
Telephone/ Internet bills
It is a common practice among sole proprietors to use their phone for
professional and personal uses and then deduct the phone bill from
their business taxes. You can also maintain two different phones if you
like and use the bills to avail a relief. The same extends to any
stationery and other things that you buy for your company on a regular
basis.
Tax Planning
All entrepreneurs that are planning to form their startups and small
business owners must understand the basics of taxation to act accordingly,
with the tax laws implemented by federal and state authority.Small
businesses can try to obtain the help of tax professionals and experts to
ensure a successful tax return. Moreover, they can also adopt various tax
planning strategies and tactics
throughout the financial year for better returns.
If anyone can’t afford one, then the Internal Revenue Services and State
Revenue department accommodates a wide variety of resources
available to them to assist the small corporation owners with tax
planning.Tax planning can be defined as the activities that a firm might
adopt to maximize its tax liabilities to increase the chances and to
ensure to gain all possible allowances, deductions, exemptions, and
exclusions available. In short, it is the process of working together in
the most tax- efficient manner to reduce the total tax bill a firm is liable
to pay in a fiscal year.Furthermore, it can also be referred to as a
component of an analysis of the financial status a business might have
in their current situation or with the upcoming plans drafted along with
the forecasted aim of increasing return on capital employed.
Calling tax planning as an important part of a financial plan would not
be wrong. Because somehow a business manages to escape from one tax
bracket to another, this leads to a reduction in tax amount or a fall in the
tax rate it is liable to pay. As well as it contributes to the maximization
of the ability of an entrepreneur to draft an excellent retirement plan,
and are also crucial for the success of the business.
How Tax Planning Works
Tax planning covers up many issues faced by most of the businesses.
Especially when planning and forecasting future financial positions of
their entity. The process includes several considerations such as the timing
of income, size, when the purchase will be made, and planning for other
expenditures against the current year earned revenue. It is also decided in
the process that for future expansion which sources of finance and
investment would be selected and aims for the most suitable retirement
plan.
All the important decisions made in this planning process directly or
indirectly affect the tax filing status of firms and deductions to create the
best possible outcome.
Types of Taxes to be Considered in the Tax Planning
Also, mention before, tax planning strategies are typically employed to
help a business in achieving its financial and non-financial business goals
and objectives. There are many benefits that an organization is likely to
gain through tax planning, and that is one major reason why experts
emphasis a lot on its importance, especially in the case of small
businesses.
In most countries, the tax laws and allowances keep on changing from
time-to-time. Hence, it is always advisable for businesses to regularly
review their strategies. The tax planning process might not affect your
whole tax structure, and rather there are few areas where the process of an
expert might be able to benefit your business, reducing the amount of tax
liability.
Capital Gains Tax
Planning for the capital gain tax means taking a number of things into
consideration, such as which asset is being to and who is going to be
the next owner of the asset. In such circumstances, you may require
the assistance of a tax planner to do the calculation for you, and notify
you about the assets that are exempted and can lead to a reduction in
the amount of tax payable.
Corporate tax
Usually, corporate tax or the tax on profit is considered to be one of
the higher costs a profitable company has to bear. Therefore, corporate
tax planning is essential for both small and large businesses, thus
allowing them to retain a higher margin of profits or extracting more
value from the business.
Corporate Tax Planning Includes
Deferring income or profits
Bringing forward costs
Capital allowances
International Tax
No matter, if you are operating a business globally, or are planning to
start one in the country, you are restricted or bound to follow the
limitations set by the tax laws. International tax planning might help
you to legally avoid such laws and can help you save local taxes as
well as the taxes levied on international business.
International Tax Planning Includes
The due date of tax bills to decide when to pay
Using the tax deferral opportunities and tax rebates
Gaining the foreign tax credits and incentives
Avoiding the case of double
Taxation Dividend/Year-end Tax Planning
Are you planning to hold back a significant profit margin in your
company, but don’t know how to do that? Then you may require a tax
expert or planner who could advise you on how to maximize your
return by decreasing the amount of tax liability. Many suggest that it
may be wise to draw out a large amount as dividends given to the
owners. However, tax consultants will be able to advise you on the
most tax- efficient manner to reward yourself and to your employees.
Inheritance Tax
Your successors or family members may be required to pay
inheritance tax once you are dead, which may reduce the amount of
your estate or wealth you have accumulated in your life that ends up
being passed on to your loved ones or legal heirs. There are many
solutions and tactics available to avoid the inheritance tax such as;
Giving your property and acquired assets as a gift to
your loved ones
Downsizing
Remortgaging & insurance options are
available Tax Planning for IndividualsIt is only a myth that
tax planning is the best option only for big businesses. Rather private
individuals can also retain their accumulated wealth through adopting an
intensive tax planning process.
Individual Tax Planning Includes
Income taxes
Gifting children
Gifting family members
Property
Pensions
Why is Tax Planning for Small Businesses Important?
Many small businesses and entrepreneurs with lack of experience consult
from taxation agencies and experts to adopt a tax-efficient strategy that
can help them with the reduction in the tax amount they are liable to pay.
In any circumstance, these professionals will insist you to focus more on
tax planning. It is because it is the most prominent and useful tool to be
used to reduce the amount of your taxable income. The process of tax
planning would result in lowering the tax rate subject to your income or
earned profit by moving it from one tax bracket to another or from the
high rate to a lower one. Moreover, it would allow you to utilize any tax
credit or incentive that may be available.Allows You to Make Smart YearEnd Decisions. Till now, you have learned a lot about taxes, its different
types, different systems, and structures. Being an owner of a small
business, now is the time to learn more about tax planning. It would be
much better if, as soon as possible, you could realize the importance of tax
planning in your financial operations, increasing the profitability and
returns of the business.You can determine the importance of tax planning
by the fact that it plays a crucial part in getting your financial records and
data up-to-date, especially at the end of a fiscal year, when you have to
file taxes for your earned income against expenses. It also allows you to
see where your corporate profits and losses stand, enabling you to make
the most effective decision in less time. A smart decision can result in the
possible minimization of your tax liabilities.
However, many business owners today are less likely to take advantage of
their employed agents and accountants for tax planning purposes. Anyone
who is not paying attention or doesn’t consider tax planning as an important
step, as a result, he or she might miss the tax-saving opportunity, which
needs to be implemented before the fiscal or financial year ends.
Other than the tax-saving benefits that you may be able to gain, through tax
planning, there are other benefits too, like you will get a head start on your
taxation. The word of head start is used, in the sense that to draft an
effective tax plan, first of all, you would review your books of accounts.
Next, you will set all the records and data on the track.
Therefore, in the process of tax planning, you might be able to do some of
those tasks that in other cases would have still been neglected. In the
situation, you might also create a list of items that you are going to need at
the beginning of the next year, and so now you have enough time to gather
the information, instead of creating a fuss in the last moment.
The list of benefits, contributing to the importance of tax planning doesn’t
just end here, rather there are way too many. So it is wise not to ignore it.
Common Mistakes Made by Small Business on Tax Planning.
The owners of small businesses are often seen to take on a lot of burden
with the whole organization upon their shoulders. It is because they are
not in-charge of only one but of multiple departments, whether it is
marketing, employees and staff management, development of product, or
accounting practices. They are always found busy working in their
business and so they are left with less time available for them to work on
the management of their corporate taxes.
Amongst the most recurring mistakes that the owners of small businesses
do when preparing a tax plan is to treat it as an exercise that is to be done
after the year-end. Many of them do their plan for their taxation before the
end of the year, and consequently, it creates no real change and left no
potential opportunity to affect the taxable income. It might be true for
those who pay their taxes on the cash basis as in this, the timing when the
cash receipts are received or what is the due date to pay them and payment
to vendors can potentially create a significant impact on the current year's
income. For example, taxpayers who pay on a cash basis have the
opportunity to deduct expenses that are prepaid until they do not exceed
the duration of 12 months or beyond the end of the following tax year.
Another mistake done by the owners of small businesses is when they
have to face failure in recognizing other important necessary requirements
that exists, and are related to their corporation. They
are required to register their vendor for sales tax, have to prepare the annual
forms such as the one 1099-MISC for their vendors, and should
appropriately report, highlighting the difference between their employed
staff members and subcontractors. If a business fails to prepare their tax
filings and plans according to the requirements that relates to the matters
mentioned above, then as a result, it can expose its corporate owner to the
unexpected burden of tax liabilities.The rate of tax subject to your income
or the tax bracket your corporate profit lie depends on the business structure
or the type of corporation you own and operate. Likewise, the procedure of
tax planning also depends on your corporate structure.In summary, the
smarter you plan for taxation, the lesser the amount or the rate of taxes you
will be liable to pay, but it’s not one time, rather it’s an ongoing process that
is going to take you enough time. If you do not understand or think that you
cannot retain the major part of it, then it is suggested that you should
consult from a tax expert and professionals or should conduct multiple
meeting session with your tax advisor and professionals within a single
year.
You should present your recent or latest financial statements and should
have a discussion on your creative ideas regards the upcoming projects,
purchases, staffing, and other changes. It will enable your employed or
hired tax advisor and professionals that when and how they can help you in
drafting an effective tax plan that can enhance your retained profit in the
current financial year and in the future.
Chapter 7 Different Types Of Accounting
Principles
Effective Strategies of Accounting Principles
The success of a business lies on how effectively the principles of
Accounting are strategized. Instead of taking a broader path on
discussing it in general, it would be worthwhile to lay down the
criteria, taking into account the different principles and how these
principles are chosen to contribute towards the efficiency of a
business.
The Accrual Principle
Accrual principle, as it already suggests, is a method that allows
businesses to record their transactions as they happen rather than when
the cash flow actually takes place. This type of accounting allows
businesses to manage future investments based on the kind of cash
flow that is expected to arrive.
Some of the ways in which Accrual Principle can be used effectively
are:●
Recording revenue at the time of invoicing a customer which
can be different to the time the cash is received
●
Recording expense at the time it is incurred rather than the time
it is paid
●
Recording bad debts at the time of invoice than to wait for the
time it is evident that the customer has failed to pay
●
Recording depreciation of a fixed asset when it is still useful than
representing it as an expense at the time it is bought
●
Recording commissions when it is earned and not the time when
it is being paid for
●
Recording wages at the time it is earned and not at the time it is
paid
The Cash Principle
Cash principle, on the other hand is a method that allows business to
record their transactions when the cash flow takes place. This type of
accounting displays the actual financial position of a business at any
given point of time. Under the pretext of the above two methods,
several strategies can be synthesized to optimize the effectiveness of a
business. To be able to make the best choice between the principles, by
any means, would be the first steps towards building a successful
business. In a small scale business, the state of the business, whether
profitable, is solely decided by the cash flow on a daily basis. These
businesses depend completely on a day’s earning to invest further. Such
businesses would benefit from choosing the Cash principle. Book
keeping of the daily transaction would prove to be very important in
deciding financial condition of the
business. Businesses that depend on unitary goods and services profit from
using such methods. Alternatively, businesses that depend on multiple
goods and services benefit from the Accrual method as investments are
possibly made based on the revenue to be flowing later, after the transaction
has occurred. Here further investments are made based on the revenue
expected and planning for the future becomes a vital aspect of the business.
Outside investors such as banks and lenders seek the predicted status of the
business in deciding whether to invest that would account for further
expansion. Choosing either one amounts to efficient accounting principles.
Further, in both types, automation proves to take a vital role in deciding
future prospects. Automation saves time and energy and allows swift
decision making. Analyzing trends through automated systems and
planning according to predictions is one other major contributor towards
effective Accounting Strategies. Again we have to remember that
automating is not easy task. Choosing the right format based on the
necessities of the business also contributes towards effective accounting
strategies. Businesses, small or large, have to make informed decisions on
the type of format that they want to use. There are several bookkeeping
formats that could be customized to suit particular business models and an
appropriate one will give an effective edge.
An example of cash accounting principles is a company X that has sold
products for $20,000 in cash and this will be recorded under cash revenue
transactions as the finished goods is sold for cash. If
the company chose to sell partly (1/2) in cash and a portion in credit, then
only $10,000 will be recorded as cash. The remaining of $10000 given on
credit will not be recorded. Now, in the case of on an equipment that has
been in operations for a while now, every year the firm sets aside a
depreciating cost of $3000 on the equipment. According to cash principles,
the depreciation is not an expense and will not be recorded as expense as
there is no cash involved. These principles make accounting easy and
simple to understand. They increase understanding of liquidity of cash in
the firm easier. They develop on single entry accounting that affects only
one account and are not bound to follow the Matching Principle.
Few of the disadvantages of cash principles are they are not very accurate
as recordings focus on cash and not the actual time that the value is gained
or lost. Cash principles as mostly not recognized by Company acts can
make it tough for large firms to follow. Unbiased auditors can involve
unfair practices by not disclosing relevant profits or exaggerating expenses
thus causing discrepancies in accounts reporting.
The cash principle will not work so well on large companies. It works better
for medium sized firms that operate under sole proprietorship
or
when the transactions recorded are quite small and mostly involving cash
only rather than credit transaction. It also goes with companies that do not
need to record income statements, balance sheets and financial statements
or those with a few fixed assets.
The Economic Entity Principle
Economic Entity Principle is another useful aspect of Accounting
Principles. It states that all transactional activities in business should be
differentiated from that of the owner or any other entity of the business.
This principle takes a variety of forms based on the kind of business
model ranging from sole proprietorship, corporation, and government
agency to partnership. Maintaining transactions as separate records in
terms of accounting records or bank accounts for each entity from that of
the business allows to clearly distinguish the liabilities and the assets of
the owners or business partners thus maintain transparency of cash flow.
Economic Entity principle proves most fruitful in the case of a sole
proprietorship, differentiating company transactions from the business
owner’s own personal transaction as in this type of business cash flow can
easily entwine. It has also proven to be useful for business that is young,
as owners tend to mix up their personal expenses with that of the business.
The Economic Entity principles applied for a number of reasons as
follows:
●
●
●
Each business has its own tax levied separately
It calculates each economic entity separately and independent of the
other thus giving a clearer picture of financial performance
individually.
It calculates payouts due when a firm is liquidated.
●
It evaluates the assets available when a legal judgment in under
scrutiny against a firm.
●
It creates boundaries for auditors to evaluate financial
transactions separately for each business entity.
The Monetary Unit Principle
Monetary Unit Principle is yet another important factor deciding
effective accounting principles, that states the transactions to be
recorded should only be in terms of currency. Here less or no
importance is given to intangible factors such as qualitative analysis of
efficiency of the employees or the rating of the service provided on how
satisfactory. It is also advised that when considering monetary unit
principle, the unit of currency chosen to record the transaction remains
stable over a long period of time, unaffected by global economic
inflation. It is wise to choose a currency such as US dollar that has not
had any drastic changes over the years. From this it is understood that
in this principle, it is vital that an asset bought decades back remain
close to its invested amount at present and that transactions be recorded
in a currency that doesn’t undergo hyperinflation. In cases of changes
business tend to review and reiterate their financial stance periodically.
Let us take an example of a company that had acquired a factory in
1960s for about $50,000. Its value has appreciated to a great extent
now. But the factory is valued to its initial cost in the financial records.
This is due to inflation not taken into consideration when valuing the
asset as per the monetary unit principle.
This principle also indicates that any transaction in monetary terms should
be accounted in the book of accounts while any non-monetary transactions
even if they are important should be excluded from the book of accounts.
The Conservatism Principle
Conservatism Principle, another influential factor of accounting principle
revolves around the recording of liabilities, revenues and assets. This
principle demands that the liabilities and expenditure be recorded
instantaneously without delay but some amount of leniency in recording
the revenues and assets can be allowed. This contributes to efficiency as
the amount of cash outflow incurred also through loss apart from revenue
and asset is an indication of caution. Businesses, more often than ever,
show less chance of restoration after a great loss using the assets it owns.
It becomes very important to know instantaneously when cash is to flow
outside to reinstate to safety.
To supplement the idea of conservatism principle, Cost Principle lays its
rules on how the assets, liabilities and equity is recorded, either recorded
earlier or later. Efficiency is defined here when businesses employ
efficient method of recording. This principle advises business firms to
record any asset, liabilities, equity and revenues using the original cost to
allow the actual spending capacity of a business to surface. But this
principle loses its significance as businesses consider it invalid and
subsequently the accounts are modified to bring about a fair value
according
concurrent monetary value of the possession in concern. The cost
principle doesn’t also allow the recording of anything that was not a
result of transactions such as manpower and brand name that at times
doesn’t express the actual position of a business in terms of the capacity
it has to generate revenue.An example of the Conservatism Principle is
an accounting entity should prioritize liabilities and be considered of
high value, of an employee’s claim in a legal case. It should do so even
if the case is not winning. Contrarily, this principle should recognize
assets of an employee’s legal claim unless the court passes judgment.
The asset is recognized at low value. This principle assumes entity
overstates assets and revenues and understates expense and liabilities.
The principle summarizes as follows:
●
Assets and Revenues are recognized at lowest values with the
exception of being able to recognize reliably
●
Expense and Liabilities are recognized as soon as they face
uncertainty.
The Consistency Principle
Consistency principle, one of the many accounting principles that
causes a business to succeed would be the consistency principle. The
underlying rule behind this principle is consistency. This principle
states that any decision made in using a particular principle should
remain consistent. Shifting from one principle to the other depending
on the convenience can cause confusion in keeping track of all business
transactions. When such a shift is bound to happen, there is all the more
reason to lose track of how the business is running as we tend to lose
comparability. Auditors also hold a universal opinion on keeping the
principles in use consistent to affect change. Consistency principle does
not take effect when a company is bound to some strict adherence of
other principles that disables the company’s ability to report a particular
revenue or profit that exceeded the normally allowed. The indicator of
such situation would be when a company was operational through its
regular standards, yet a change was impelled upon by an unexpected
profit. An example is when Company X uses IFRS to report Financial
Statements. And IFRS supports depreciation policies to use the straightline method to calculate depreciation year-on-year. However in
subsequent years the company decides to change its method of
depreciation to Declining balance. In such a case the company must
apply with IAS 8 whatever the change is. All the changes will need full
disclosure in the financial statements and information of how the
change is affected.
The Full Disclosure Principle
Transparency of a company’s financial condition is one major
contributor towards a company’s success, and this becomes possible
when a company adheres to Full Closure principles. In this principle,
the company is liable of being transparent with all its financial
statements and make known the company’s prevailing conditions to all
those who are necessitated by the progress of the company. This
principle plays an important role in determining whether stakeholders
can afford to invest in the company. By implementing the disclosure
principle, the people who are willing to invest are not misled and
decisions can be made through thorough analysis of what would incur.
Following the disclosure principle, the company is required to disclose
details of accounting policies; where and when a principle is substituted
for another; financial statements; inventory losses; how transactions
take place; details of asset retirement obligations; VAT changed
expected in the future; the tangible properties that constitute the
company; the kind of agreements that the owners and shareholders
have; and all the liabilities; their proceedings that have been taken
legally.
For example, Company A buys a property. A by passer experiences a
fall and gets injured. The injured is suing the owner of the property for
negligence. The principle of full disclosure assures the by passer will
win the case the next year. This is due to the requirement where
Company X has to compulsorily disclose, and anticipated losses include
that of the lawsuit in the footnotes of their financial statement and this
is a must irrelevant to the loss being finalized or confirmed as yet.
The Going Concern Principle
A complementary concept to the disclosure principle is the Going
Concern Principle in business that assumes that a company under
function will remain in function forever or for a predictable amount of
time until the objectives of the company are met. It is also very
important for the reason that accrual Principle is only possible based on
the assets of the company owned by individual entities of the company.
If the assumption of the Going Concern Principle is broken, then it is
most like that the company is under bankruptcy and is going to undergo
liquidation.
This is the reason why the Going Concern Principle becomes
complementary to the disclosure principle as it assures the amount of
transparency allowed by the disclosure principle informing the financial
condition of the company. The Going Concern principle is also essential
in terms when investments are to be made on the potential of the company
to sustain.
The Matching Principle
The Matching Principle as the phrase suggests is an accounting principle
that instructs the expenses incurred to a business at a said period of time to
match with the revenue generated at the same period of time. This further
works hand in hand with the accrual principle, which allows the expenses
and the income to be adjusted minimally to tally the balance sheet for a
stipulated period. When recording the transactions of a business it is
advisable to make sure that all expenses together with the revenue earned
be placed in the same pool of time frame to make sure of the prevailing
condition of the business. In case the expense incurred doesn’t link
directly to the revenue generated, the expense should be recorded in the
time before which it is exhausted. Contrarily, if a gain of expenditure
cannot be predicted in the foreseeable future, the expense should be
recorded as such in the same period and should be duly charged. This
helps business keep their records clean and aids to efficient accounting
principles.
The Materiality Principle
Materiality Principle, one principle deciding factor of effective
strategies is a concept that decides how worthy for a business to run are
the recorded factors. Materials that do not cause a significant change in
the way the business is run or materials that are considered too trivial to
influence the running of the business do not fall under this category.
Again the information provided, as it makes sense to the objective of
the audience, decides if a certain factor is materialistic or immaterial.
We should also note that any material whose record informs the
potential prospects of a business in terms of loans and credit fall under
the materials to be considered. An auditor viewing the statement, from
its prime role can decide whether the transactions recorded account or
be material or immaterial.
The Reliability Principle
Reliability principle, another effective strategy in sustaining a business,
is a concept that makes sure that the transactions recorded as part of the
accounting scheme are evidence that are factual, provided by other
credible components or entities of the business such as banks, suppliers,
valuation experts and clients whose supplied documents carry a greater
value in assessing the financial stance of the company than the
documents compiled internally by the firm. Some such documents
could be purchase orders and receipts, cancelled checks, statement of
accounts from banks, reports of appraisal and promissory notes. The
limitation of this principle is when the firm records the reserves as
forms have to potentially keep record of an allowance for accounts in
doubt or the sales return reserve that are considered more of an opinion
than a fact. In such cases, these documents should be backed up by
thorough analysis based on trends that had been experienced in the past
that could prove to be a substantiation of the claim.
Chapter 8 The Cost Principles
The cost principle (or the cost constraint, to be more correct) is the last
of the officially-recognized generally accepted accounting principles but not in any way the least important one.
We have just briefly touched upon a concept similar to the cost
principle. Earlier, we said that when the costs of abiding by generally
accepted accounting principles are too high, accountants have the
possible option of omitting them.
The cost principle, also known as the cost/benefit principle or the
cost/benefit constraint, states that the cost of providing information in
your financial statements should be compared to the benefits of
providing that information.
Now, this is a pretty tricky concept to grasp, precisely because it could
lead to accountants and management to be tempted to omit certain
negative information from their statements, stating that the information
was too expensive to research and put together, as compared to the
benefits of doing it.
It is, however, extremely important that you understand this constraint.
Together with the materiality constraint, they lie at the very foundation
of both generally accepted accounting principles and the constraints
associated with them.
The cost benefit principle was not always followed. In the past,
accountants informally tried to create some sort of balance between
the cost of providing information and the practicality of doing it.
However, today, a lot of businesses apply the cost benefit constraint - so
they analyze the benefits of providing certain types of information in their
financial statement and measure it against the cost of doing it.
The Issue with the Cost Principle
The cost/benefit principle is, like all generally accepted accounting
principles, simple in theory. But it can get very complicated when you go
in-depth and try to apply it to real life situations.
The cost part of the cost benefit principle is easy. You pretty much just
have to analyze the costs of collecting, researching, putting together,
processing, analyzing, storing, auditing, and sharing data.
When it comes to the benefit part of the same principle, however, things
can get very tricky, because it is difficult to quantify it. For instance, if the
information you want to provide an investor will offer them the chance for
an accurate assessment of the company’s financial situation, this is clearly
a benefit and the information should be included. However, it is difficult
to assign an actual value (numerical value, for that matter) to this benefit.
This entire issue makes the application of the cost/benefit principle a
judgment call on the side of the accountants handling the situation. At all
times, the concept of transparency should be applied, though - which
means that you should not use the cost/benefit principle in an abusive way,
to maneuver financial statements to the company’s major advantage.
Is the Cost Principle Applied at All Times?
No, the cost benefit constraint is not to be applied on all types of
financial reports. The ones the cost benefit principle applies to are very
clearly stipulated in the accounting standards - and in all of the
situations excluded from that list, all of the financial data should be
reported regardless of what the costs associated with this might be.
In reality, very few types of information are actually expensive to
acquire and this means that there is a very small number of situations
when accountants are allowed to actually forego and avoid reporting a
situation.
The cost benefit constraint is there to help bookkeepers and
management keep everything transparent and efficient for the company.
It is, however, one of the generally accepted accounting principles you
are not very likely to use very often, precisely because it is very wellconstrained itself as well. Use it cautiously and always check with the
official accounting standards when in doubt!
Chapter 9 Revenue Recognition Principle
The revenue recognition principle is used in accrual accounting (the type
of accounting that records both expenses and revenue when they occur,
not when the cash is actually received).
That is what the revenue recognition principle stands for: a business
should record their revenue not when they receive the cash (or pay the
cash), but when they are actually acknowledged.
Basically, the moment you send an invoice to a client, you already record
it on your balance sheets. For instance, if you have provided marketing
services to a client and they were worth $2,000, you will send the invoice
at the end of February.
However, the client will not pay you for another three months, which
means that the revenue will be cashed in only at the end of May - but it
will be considered as “realized” at the end of January, when you delivered
the services and sent the invoice. In accrual accounting, you will record
the invoice on your balance sheets as if it already “happened”
- and this is based on the revenue recognition principle.
In some ways, the revenue recognition principle is similar to the matching
principle. The main similarity between the two is related to the fact that
every activity should be recorded when it happens. The main difference,
however, is that the revenue accounting principle only refers to revenue
and the accounting period that they
should be recorded in. At the same time, the matching principle talks
about the expenses and the correct accounting period that they should
be recorded in.
Both concepts are used in accrual accounting and lie at its very
foundation. They are also basic generally accepted accounting
principles, which makes them quite important especially for businesses
who plan on going public, because it allows for a standardized method
of bookkeeping that will not keep potential investors and creditors in
the dark.
It is worth noting here that cash accounting is used as well. However, it
tends to be less popular with businesses who want to go public,
precisely because records might be unreliable (the cash might take
some time to enter the flow, and thus, the records might be altered).
When is the Revenue Recognized?
There are some rules to guide accountants in knowing when to
recognize the revenue (and thus, when to enter it in their books). In
general, there are five steps that have to be followed for revenue to be
considered as “recognized” and ready to be entered on the balance
sheets:
1. There has to be some sort of link with a contractor. Most
often, this is a written contract that has clearly defined their
financial compensation. Sometimes, an oral arrangement
can be used as well.
2.
The performance obligations in the contract (written or verbal) have
been noted. Put simply, a performance obligation is a point the
contractor has to meet as per the contract they have signed or agreed
with. So, for instance, if you own a marketing company and you make
2,000 visits to your website a performance obligation, you have to
deliver - and once that happens, you can take note of it.
3. The price of the transaction has to be determined. This means that, as a
provider of services or goods, you have to determine the transaction
price in your contract. This will become the amount of consideration
your client has to pay in exchange for the services or goods you have
delivered. Keep in mind that any kind of money collected on behalf of
third parties (e.g. a copywriter your marketing firm has contracted for
this specific project) should not be included in the transaction price.
4. The price of the transaction and the performance obligations should be
matched through a process called “allocation process”. Basically, you
can allocate the price to the performance obligation that reflects the
aforementioned amount of consideration you, as a seller, expect to
receive when the performance obligation is satisfied. When determining
this allocation, you have to first estimate the selling price
of the services or goods you have delivered from the moment the
contract started.
5
Recognize the revenue when the obligations are fulfilled
(i.e. when the services or goods you are selling have been
transferred to the customer). When the transfer is completed
(the customer is in possession of the services or goods), the
revenue can be recognized.
Exceptions from the Revenue Recognition Principle
While the revenue recognition principle is commonly used in accrual
accounting, there are some exceptions as well. The main situations when
the revenue recognition principle should not be used include the following:
In some cases, manufacturing businesses may have to recognize the revenue
during the production process (as opposed to recognizing it when the
products are sold). This is especially true in the case of long-term
contractors (such as those working in defense or construction, for example).
In these cases, the revenue will be realized (and then cashed in) at various
stages in the process (e.g. when the foundation of a new building is laid,
when the first floor is up, etc.).
6
.
1. In some cases, manufacturing companies will recognize the
revenue once the process is done, but before the actual sale is
done. For instance, this is commonly used in agriculture and
mining - and the main reason this
method is used in these industries is because the goods are good to go to
market and sold as soon as they are mined, plucked, or harvested.
2.
When accrual accounting is not used and when companies do their
accounting on a cash basis, the revenue recognition principle is not
followed (because, as explained before, it goes in contradiction with the
type of accounting used). Companies that work based on installment
sales are more commonly inclined to this accounting method.
Chapter 10
The Time Period Principle
Consistency is an important element when reporting financial
information. Without consistency, it would be impossible to compare
one period to the next. For example, imagine that a company releases
two statements; one weekly and one monthly. You could not use these
two statements to calculate ratios or compare the two financial
statements in any way and expect to get an accurate representation of
the company’s financial standings. The time period assumption exists to
ensure businesses report in a consistent manner and in accordance with
recognized financial periods. Even though they may create internal
reports monthly (or even weekly in some cases), most companies are
required to provide financial statements at least once per year. Often,
they help customers keep track of their earnings by reporting quarterly
as well, which is approximately every three months.
What is the Time Period Principle?
The time period principle describes different reporting periods for a
business, usually over a standard period of time. Financial results are
usually reported monthly, quarterly, or annually, though a combination
of these is usually used. Monthly are most common for internal reports,
as these help business owners make decisions about how to best
allocate resources and notice possible problems and trends. This
principle is also known as the periodicity assumption.
The periods describe a certain time within a business. A business’
periodicity is divided into accounting periods for its entire lifetime,
usually into accounting periods with the same length. When creating a
financial statement, a header is included that describes the time period.
Statements should also include dates. When choosing which financial
transactions to include, as well as which revenues and expenses should be
realized, all the information included on and pertaining to that financial
statement should fall within the dates mentioned at the top of the
statement.
Why is the Time Period Principle Important?
In addition to establishing a consistent period of time for financial
analysis, the time period principle allows companies to take an accurate
screenshot of their financial standings. With time periods, businesses can
recognize revenue and expenses as they are incurred by period.
The time period principle is one applied to all areas of accounting. Even
companies using the cash-basis method of accounting will need to use this
principle to create segments of time in their business. Then, finances can
be reported in these periods.
Frequency of Reports and the Fiscal Year
In most cases, companies generate external reports at least once annually.
In this case, the accounting period lasts 12 months. Some companies
choose to begin their year on January 1 and end on December 31. For
others, a fiscal accounting year is used. This
can be any day, as long as it is an annual period. For example, a
company might release its financial statements from March 1 of one
year to February 2 of the next. Accounting reports are released more
frequently when a timely report is needed.
The fiscal year is ideal for companies that experience high levels of
sales during the holidays, such as retail locations or jewelers.
Companies may also choose their financial fiscal year depending on the
official start date of their company. Time periods can be thought of as
artificial, as there is no specific guideline for which dates a company
must use to report.
The decision on how to use periodicity is usually made at the start of a
company. They must decide if they are going to report their revenue as
is and report for a partial year (such as a company that begins their
startup in May or June) or if they are going to report using a fiscal
period. Even though some companies opt for a fiscal period, they may
choose to do this using dates that are near those when taxes are due.
Otherwise, they would end preparing separate financial statements
when filing taxes and when reporting to other external parties, which is
not a good use of company time.
The Time Period Principle and Other Principles
For the matching principle and the revenue recognition principle to be
followed, companies must be able to have time periods to match their
revenues and expenses to. Otherwise, the matching of revenues and
expenses would be irrelevant and immeasurable. Not to mention,
without the time period principle, trying to report
any kind of financial information would be messy, unverifiable, and
unreliable.The time period principle is also closely related to the going
concern principle. As businesses operate as if they are going to remain in
business, they can accrue accounts payable and accounts receivable. This
gives flexibility when reporting, while still adhering to the time period
principle and the principles of revenue recognition and matching.
Chapter 11 Applying The Principles Of
Accounting ToThe Accounting Cycle
Before financial statements can be completed, all the information needs
to be collected and put together in the right way. The accounting cycle
can be broken down into 9 steps that make the entire process a lot less
intimidating. Now that you are familiar with the principles of accounting,
you should be able to apply them to the accounting cycle for preparing
statements and analyzing financial data.
Step 1: Identification and Analysis of Business
Transactions
Accountants first go through all the business transactions and events that
have occurred since the last reporting cycle. It's important that the
transactions pertaining to the business entity are separated from those
that do not. When good records are kept and the business owners keep
their personal finances separate from the finances of the business, it is
significantly easier to do this first step.
Once all the appropriate receipts are separated from those not pertaining
to the business, the transactions are analyzed. They should be organized
according to date, as this will make the next process easier. While
analyzing, you must decide which accounts to debit and which accounts
to credit. Though you are going to copy these amounts in the journals,
you should keep the primary information as source documents. In the
case of a discrepancy or an audit, the source documents are considered
more reliable than prepared financial statements or journal entries.
Step 2: Journal Entries
Next, you are going to record the source documents in the journals. The
double-entry accounting method is used, so every journal entry is going to
include the date, a description, and at least two accounts. One account
will be a debit and the other will be a credit. Something to note is that it is
possible to have more than two accounts for a single journal entry. For
example, if a company has paid part of their rent in advance, the entry
might look like this:
Jan 17
Rent
4500
Expense
Cash
Rent Payable
2700
1800
A basic entry that has just two entries might look like:
Aug 11
Cost
of
675
Maintenance and
Repairs
Cash
675
As journals are the first official recording of business transactions, they
are often called the Books of Original Entry.
Accounts You Will Use When Writing Journal Entries
As you create journal entries, the biggest challenge is going to be
deciding which accounts to debit and which accounts to credit.
Accounts are classified according to a specified account. For example,
assets are usually broken down into four categories; current assets,
long- term assets, prepaid and deferred assets, and intangible assets.
These are the accounts most commonly listed on the income statement:
Revenue
●
Sales
Cost of Goods Sold
●
Cost of Goods
Sold Operating Expenses
●
Salaries and Wages
●
Marketing Expense
●
Advertising Expense
●
Rent Expense
●
Insurance Expense
●
Amortization Expense
●
Utilities Expense
Other Income
●
●
Interest Income
Gain on
Sale
Other
Expenses
●
Interest Expense
●
Loss on
Sale
Income
Tax
●
Taxes
These are the accounts most commonly listed on the balance sheet:
Current Assets
●
●
●
●
Cash
Inventory
Accounts Receivable
Marketable Securities
Allowance for Doubtful Accounts
Prepaid Expenses
Fixed Assets
●
Land
●
Equipment
●
Buildings
●
Accumulated Depreciation
●
Leasehold
Improvements
Intangible
Assets
●
Intellectual Property
●
Goodwill
Investments
●
●
Investments in Stocks
Investments in
Bonds Current Liability
●
Accounts Payable
●
Income Tax Payable
●
Cash Dividends Payable Shareholders Equity Common Stock
●
Capital Stock
●
Preferred Stock
●
Treasury Stock
●
Dividends
●
Retained Earnings
●
Paid-In Capital
Another Note About Journal Entries
Writing journal entries can be compared to Newton’s third law of motion.
Every action should have an opposite and equal reaction. This means two
things. First, you should expect that every journal entry requires at least
two entries. Second, you should expect that your two journal entries
equate to the same amount.
In the case of needing more than one journal entry, two of the entries will
have the same value in either debits or credits as the other entry has in
debits or credits. This creates a balance that is necessary for checking
company financials and being sure that all the values align properly.
The reason balance is so important is because it verifies a company’s
earnings. It prevents employees and business owners from stealing from
the company, a practice which is called embezzlement. There have been
many cases of embezzlement, though the numbers eventually failed to add
up and the responsible party was held accountable for their actions.
Bernie Madoff is a famous investor who was arrested in 2008 after a
complex scheme allowed him to convince investors to give him $65
billion that he stole from the company. He was sentenced
to 150 years in prison. He was charged with false filings, investment
advisor fraud securities fraud, and money laundering with 11 total
charges brought against him.
Kenneth Lay was the CEO of Enron who is known for his role in the
bankruptcy of the natural gas company. After years of accounting fraud
and corporate abuse, Lay cost shareholders of Enron close to $11
billion. Though he was charged, Lay died before sentencing.
There are countless other examples of fraud and embezzlement
throughout larger companies. Though many forged accounting
statements for some time, the truth eventually came to light and the
people responsible in these cases were punished severely. In a way,
being aware of discrepancies when the books just do not add up can
help uncover these schemes, particularly when whoever is stealing from
the company does not fully cover their tracks.
,
Examples of Journal Entries
Once you are following the rule of equal and opposite reactions, the
biggest obstacle is going to be deciding which accounts to debit/credit
with transactions. The best way to do this is through practice. Don’t
worry if it takes time, you’ll get the hang of it eventually. Something
else that is useful is recording what each entry is for. This makes it
simpler to track the flow of cash, particularly if you find yourself
unbalanced later. As you create the journal entries, note what each entry
stands for.
The ideal entry is going to look like this:
Date
Account Name
Debit
Supplies Expense
Cash
To record the purchase of supplies
500
Credit
June
12
500
As you can see, each entry is going to include the date, which accounts
are involved in the transaction, the debits and credits associated with the
transaction, and information about the transaction. Here are a few
examples you can look over to get some ideas about how to create a
journal entry.
Step 3: Posting Entries to the Ledger
The ledger is used to aggregate the different accounts and provide an
overall amount for each of them. This helps accountants reach a total
amount that can be debited or credited to the ledger. For example, you
would go through each page of the journal and add all the cash debits
and cash credits. In the end, the difference of cash credits and debits
would be either debited or credited to the accounts on the ledger
(depending on if the credits or debits are larger). This is done for all the
accounts.
One of the most common ways of preparing the ledger from the journal
entries is T accounts. To do this, you’ll need a T account for each
account you use when creating journal entries and preparing your
balance sheet. The T account is simply an entry that is headed using the
proper account that has two columns. It is called a T account because of
the shape of the entry.
To create a T account, simply place all the debits on the left-hand side
of the ‘T” and all the credits on the right-hand side of the “T”. The
position of values on the T account will be determined by whether they
are a positive or negative value, or a debit or credit. For assets, the
debits will be positive amounts and the credits will be negative
amounts. For both liability and equity, the debits will be negative
amounts and the credits will be positive amounts. This makes sense, as
all the debits (positives) from the debit column of assets will equal the
positive value of the credits in liability and equity. Likewise, all the
negative credits
associated with assets will be the same amount as the negative credits of
equity and liability.
Step 4: Creating the Unadjusted Trial Balance
The purpose of a balance sheet is to have the same number of debits and
credits. This is a sign that a company has credited and debited the proper
accounts for each transaction. To create a trial balance, add all the credits
from the ledger in one column and add all the debits in the other. The two
amounts should be the same if the entries are correct.
The purpose of a trial balance is to determine if there are any errors. If
there are errors, they’ll need to be reversed or rectified and you’ll move
on to the next step.
Here’s an example of what an unadjusted trial balance might look like:
Cash
21,690
Accounts Receivable 6,100
Office Supplies
18,900
Prepaid Rent
24,000
Equipment
95,000
Accounts Payable
6,200
Notes Payable
Utilities Payable
Unearned Revenue
Common Stock
Service Revenue
Wages Expense
Miscellaneous
35,000
2,490
4,300
100,000
65,300
34,900
4,200
Expense
Electricity Expense
Telephone Expense
Dividend
Total
2,400
1,500
4,600
213,290
213,290
Step 5: Adjusting Entries
Adjusting entries are those that have not yet been recorded between the
preparation of the financial statement and the official reporting of the
statement. There may also be some income that has been earned without
being entered into the ledgers.
These adjustments are posted to the accounts before the summary. You
may have to adjust some of the amounts in the trial balance to reflect the
new numbers. Usually, adjustments are used to report prepayments,
allowances, depreciation, deferrals, accrual of income, and accrual of
expenses.
For example, an asset with a present cash value of $13,000 with a
depreciation of $400 per month would be adjusted at this time. The entry
might look like this:
Sep
13
Depreciation
Accumulated
Depreciation
To record scheduled
depreciation
400
400
This is also the time when a company accounts for those things changed
by adhering to the accrual accounting principle. For example, imagine
that a company was prepaid $900 for providing a service. In the initial
recording entry, the company would have debited the cash account and
credited the unearned revenue account. Once they have completed the
work, the adjusting entry would debit the unearned revenue account
900 and credit the sales revenue account.
On the opposite side, when a company sends an invoice for work
completed that can be paid the following month, the accounts
receivable account is debited and the sales revenue account is credited.
Step 6: Adjusted Trial Balance
An adjusted trial balance takes the adjusting entries into account and
debits or credits them to the accounts on the unadjusted trial balance.
When you add the debits and credits, they should equal the same
number. If you cannot reach a balanced state, you’ll likely need to go
over your work and see where you went wrong.
Another example would be the adjustment entry made for employee
wages that were accrued in one period and paid in another. The initial
entry would debit wages expense and credit wages payable. The
adjusting entry would debit wages payable and credit the cash account.
Step 7: Financial Statements
Once the accounts are up-to-date and you have checked the math, you can
prepare the financial statements. If you are creating a complete set of
statements, you’ll need to include the statement of comprehensive income,
statement of changes in equity, balance sheet, statement of cash flows, and
notes to financial statements.
There are five base elements to all the financial statements, including
assets, liabilities, equity, income, and expense. By analyzing companies in
these areas, it gives a broad scope of the finances of the company without
going into the finer details that most investors and stockholders are not
interested in.
Within the accounting statements, income is meant to describe any
economic benefits. This includes inflowing cash or the improvement of an
asset, however, it also can be the decrease in liabilities or amounts owed.
What is not included in income is any equity derived from shareholders,
as this amount does not reflect money earned by the company using its
resources to generate revenue.Put simply, revenue is that tracking of a
company’s revenue and gains. Revenue is any money that arises from
normal business proceedings. For a private tutor, the revenue would be the
cost of a session paid as their fee. For a furniture manufacturer, revenue
would come from the sale of furniture. Gain, by contrast, represents
money that a company has earned outside their normal scope of business.
If a furniture manufacturer decided to sell one of their machines after
replacing it with a new one, they could realize any amount earned on the
old asset as a gain.
Expenses are any decrease in the economic benefits realized by the
business. This includes money spent on operating expenses as well as the
deterioration of an asset. Expenses could also be increases to a company’s
liabilities. The information that is excluded is any outflow or distribution to
shareholders, as this is also considered equity. In addition to including
expenses, the expenses are included as losses of the business. For example,
if the furniture manufacturer sold their machine asset at a lower price than
its depreciable cost, it would result in a loss that would be recognized as an
expense.
Equity is the money that an entity can use to make changes, invest in
activities, and use to generate revenue. However, this equity is not
considered part of a company’s normal profits and losses because it is not
related to doing business. Equity includes stock that has been issued and
contributions from the owners into the company. When a company
experiences a gain, they often decide how much to put back into the
business and how much they will distribute to stockholders and owners to
maintain their line of equity.
Step 8: Closing Entries
Entities close out temporary accounts to get ready for the following
accounting period. For example, income and expense accounts for the
month will be zeroed out so they can be accurately calculated the next
month. Usually, these are closed using a summary account. The goal of
closing entries is to remove those temporary accounts that a company uses
to help keep track of earnings during the financial period.
These accounts fluctuate depending on the money coming into and going
out of the company. The asset, liability, common stock, and retained
earnings accounts are not closed. By zeroing out the temporary accounts,
a company has a clean slate and can appropriately track its earnings for
the next period.
Step 9: Post-Closing Trial Balance
Once closing entries are made, the debits and credits should be balanced
again to check accuracy. Only real accounts can be balanced, meaning those
accounts that begin with a balance from the previous accounting period.
Real accounts are also considered permanent accounts. Some of the real
accounts on the balance sheet include assets, liabilities, and stockholders’
equity. All the accounts that were closed out in the last step are not
included. Here’s a look of what company DEF’s post- closing trial balance
might look like: Company DEF Post-Closing Adjusted Trial Balance For
the Period Ending December 31, 2003
Cash
Debit
Credit
25,180
-
Accounts Receivable 4,500
-
Office Supplies
5,100
-
Prepaid Rent
25,000
-
Equipment
100,000
-
Accounts Payable
-
19,200
Utilities Payable
-
3,200
Unearned Revenue
-
4,100
Interest Payable
-
200
Notes Payable
-
15,000
Common Stock
-
100,000
Retained Earnings
-
18,080
Total
159,780
159,780
Chapter 12Applying What You’ve Learned
To Accounting Ratios
The ratios in this chapter provide key measurements for analyzing a
business’s health. Ratios are a tool to compare one business against
industry standards or another similar business.
The ratios you will learn are:
• The current ratio
• The quick ratio
• Return on assets
• Return on equity
• Net profit margin
• Gross profit margin
Liquidity Ratios
Liquidity ratios determine how easily a business will be able to meet its
short term obligations. With liquidity ratios, the higher the number the
better.
Liquidity ratios include:
• the current ratio
•
the quick
ratio
Current
Ratio
The current ratio calculates a business ability to pay current liabilities
with current assets. It compares what the business owns comparted to
what it owes.
It is presented like any other ratio, with two numbers separated by a colon.
Anything above 2:1 is considered acceptable.
The formula for current ratio is:
Current Assets ÷ Current Liabilities
Using the numbers from the sample balance sheet: 11,500 ÷ 4,500 = 2.6:1
The business has a current ratio of approximately 2.6:1. That means it can
pay it current liabilities 2.6 times out of its current assets.
Quick Ratio
This ratio is very similar to Current Ratio, except that it removes
inventory from the calculation of assets, on the assumption that
inventory is harder to get rid of. Anything above 1.5:1 is considered
acceptable.
The formula for the quick ratio is: (Current Assets - Inventory) ÷ Current
Liabilities
Using the numbers from the sample balance sheet: (11,500 - 1,500) ÷
4,500 = 2.4:1
The business has a quick ratio of approximately 2.4:1, meaning it can pay
it current liabilities 2.4 times out of its current assets less inventory.
Profitability Ratios
Profitability ratios allow you to make comparisons of profitability
between businesses of different sizes. For example, the net income of
Walmart is going to dwarf your local supermarket profit. However the
business with higher profitability ratios is the more profitable.
Return on Assets
Return on assets is a measure of how efficiently a business uses it assets.
The higher the percentage the more efficient the business.
The formula is: Net Income ÷ Total Assets
Using the data from the sample income statement and balance sheet:
3,000 ÷ 12,500 = .26 (x 100 to make a %) = 26% Not a bad return!
Return on Equity
This ratio determines how efficiently the business uses the owner’s
funds. The formula is: Net Income ÷ Shareholder Equity
Using the data from the sample income statement and balance sheet
from earlier in this book:
3,000 ÷ 8,000 = 37.5%
Net and Gross Profit Margin
These two ratios measure the amount of money that the business earns as
a percentage of overall revenue.
The results of both equations are expressed as a percentage. The higher
the percentage the more efficient the business.
Gross Profit Margin
Gross profit margin measures how efficiently a business used it
materials and labor in the production of the goods it sold. Gross profit
margin takes into account only the cost of making the product or
service. The higher the gross profit margin the better because the
business retains more of each dollar of sales, which means more money
left over to pay operating and expenses.
The formula is: Gross Profit ÷ Gross Sales
Net Profit Margin
The net profit margin shows what the business has earned after selling
its products and paying all expenses – the true bottom line. The higher
the percentage the better. It demonstrates who efficient a business is at
converting sales into profit.
The formula is: Net Profit ÷ Gross Sales
Using the data from the sample income statement and balance sheet:
3,300 ÷ 22,000 = 15%
Chapter summary
• The current ratio calculates a business ability to pay current liabilities
with current assets.
• The quick ratio is very similar to Current Ratio, except that it removes
inventory from the calculation of assets.
• Return on assets is a measure of how efficiently a business uses it
assets.
• Return on equity determines how efficiently the business uses the
owner’s funds.
•
Gross profit margin measures how efficiently a business used it
materials and labor in the production of the goods it sold.
• The net profit margin shows what the business has earned after selling
its products and paying all expenses.
Chapter 13 Cash Flow, Functions And
Working Capital For Effective Accounting
In this chapter we are going to look closely on the flow of cash through the
business, its role and functions, how it is generated, its source and uses and
also the working capital within the firm. There’s been quite a myriad of
concerns with modern businesses and how they have manipulated rules of
accounting to portray profits that do not really reflect economic reality,
although they perceive to have followed the technical guidelines, slightly
deviating from the standards set by accounting bodies .
Cash Flow in Detail
In the case of cash, this is free of judgment but is most likely to not
givethe precise value of a firm’s performance.It is important to know that a
business perceives flow of two entities, that is the profit flow and cash
flow within the business, and both are derived at differently. Cash flow
involves inflow and outflow, doesn’t leave room for any creativity while
cash moves in and out of a business. Profit flow allows legitimate ways of
adjustment to arrive at the true value of profit, cash shows reality by the
movement of money, at least this is how it is designed to be perceived. For
any new project introduced by the firm, it needs cash and approval of
budget from the finance director who decides if the firm has
substantial cash to run the project. A firm doesn’t go bankrupt when it
incurs losses, but it does when it is running out of cash to settle its debts
and liabilities.
Although cash flow does not say much about a firm’s performance or its
level of success or failure, it is vital as it determines short term viability for
the firm to operate. If we are considering a 12 year plan for a firm, unless
we see to it that the firm has cash to operate for every of the 12 years. If not
it will not work. Managing cash is there key to operating a business. This is
rather a continuous process of generating the apt flow of cash rather than
holding cash still and saving it for the rainy days. This obviously means that
cash needs to be used to purchase equipment for the firm. If cash does not
flow and is saved on every little bit of equipment, then machinery could get
outdated over time and this can cause problems to the success of the
business.
Although bankers perceive to aid entrepreneurs with cash to start a
business, in reality they do not give cash without maximum benefit they go
into agreement a lender. Going overdraft can cause entrepreneurs to become
overly dependent of bank manager’s decision to further settle a loan
payment. Bank lending usually works on a certain working capital ratio
which companies struggle to meet. However, since they like to keep up to
loan covenants, they operate under these set ratios. However, this
causes decision making power to shift to banks who then monopolize the
business.
Why do we need Cash?
The saying that money is not plucked from the trees often rings a bell.
Therefore, money is made. Now why is money made? There has to be
some purpose on making money! Here it is subdivided into categories
below as to what the purpose of money is for a business.To make a
transaction, for example, any usual day to day transaction of a business
like paying utility bills. For precautionary measures, to pay off for any
unexpected event,For Speculation, when trying to invest on a new
business, or purchasing shares of a running business
Now let us look into each purpose more carefully.
Paying Bills: The company needs to have cash to settle bills when they
are due as paying on time is an important factor that builds and
maintains the reputation of the firm. It can also create a long term good
impression to suppliers at times when the business is running low.
Paying Suppliers: Suppliers provide on credit under specific timings for
settlement based on government rules or at time privately negotiated
between firms and suppliers. Usually payments are agreed to be made
at the month end following the month of delivery. The current trend of
businesses permitting customers maximum time to pay is causing
companies to struggle.
Paying interest accumulated from loans: - Bankers expect payments to
be made regularly to settle accumulating interest and part of the
principle loan that they have lent a firm. Taking the right amount of loan
is vital for any business to operate. Knowledge of Accounting and cash
flow can give an approximate idea of how much the firm is able to repay
monthly. Excessive loans can bring down a company to bankruptcy when
banks eventually decide to stop lending. This causes further problems
where the company suffers to settle the existing loans.
Paying tax: - Governments keep track of businesses and how they make
money. The tax authorities will request tax payment in cash when they
discover that the profit has reached a certain threshold that is becomes
liable to tax.
Working Capital Inflation: - Inflation has an effect on working capital.
Let’s consider a case where you have 500 items of inventories at the
beginning of the year, the cost of each being $1.00 each. If the remaining
stock at the end of the year is 500 but the cost has risen to
$1.05 each due to the increase in price of raw material and labor caused
by inflation by 5%. This is the extra cost of $25 for stock has to be put
into the business in terms of cash that was earned throughout the year.
Optional payments: - For this, companies have a choice to think and
decide the right time to purchase and to pay. Few months could be better
on cash flow than others.
Companies need to be careful not to commit to dealings below at a time
that cash flow is low.
Capital expenditure: - Non-current assets are purchased by cash. There
are options to buy in instalments or loans thus creating a cash reserve to
operate the business. Companies usually allocate a budget every year to
control capital expenditure and they weigh their choices and invest very
carefully as once spent, the payments are quite irreversible. This can
have a significant effect on the cash flow. For example, if an employee is
hired, he has to be paid. Therefore cash is already committed to. If the
company wants to acquire a building, then cash is already spent on local
councils. Suppliers can be paid monthly but when deciding to buy a new
property, the decision is optional and depends on management
Acquisition of other Firms: - This is done by offering cash to the other firm
or buying shares. They may alternatively offer shares or loan notes in
exchange to purchasing shares from a company. However, cash attracts
more investors as this gives the real value as opposed to company shares
that could only offer perceived value. Although cash offers are usually
lower, research shows that acquisition is usually agreed by cash as
compared to those issued by shares. In cases where an acquisition is made
with exchange of shares, it is usually down with a part payment of cash that
helps to finalize the deal. Cash acquisitions are very rare these days owing
to the large sum of money that has to be settled that is also taxable by
governments.
Paying dividends:- They are often paid to owners and shareholders in cash.
Alternatively, some agree to be paid with additional shares. Paying
dividends through shares helps to retain cash. Dividends are settled also to
maintain confidence in the stock market. If dividends remain constant over
time, then this is word of warning. If it gets lower then this is something
that needs immediate action to be taken. If companies fail to settle
dividends as they did as a trend for a couple of years, then this will result in
shareholders selling out. Therefore dividends are considered to be
compulsory payments that have to be settled mandatorily. Failure to do so
exposes the company to everyone around as failing and will be losing their
image, reputation and credibility
.
5.1
Sources of Cash
We have understood, so far, the importance of cash to run a business. Now
we are going to see where cash can be obtained from. Cash can be high
only when the business is operating well. We already mentioned about the
concept of high risks yielding higher returns. Therefore the more the
investment and borrowings, the higher is the expected return from
shareholders and bankers.
So how is cash put into a business?
1. Shareholders invest directly or indirectly into the business.
Setting aside a part of the profit is an effective way to
increase cash. This can be done by utilizing the profits that
are gained by cash flows and saving some than to distribute
all amounts as dividends to shareholders. Therefore by this
retention, shareholders are indirectly investing more into the
business. Another option is for shareholders to agree on more
shares in the place of cash dividends
Shareholders may choose to buy more shares if the company has created a
good reputation for returns in the past.
Either ways, the investment of the business rises thus leading to higher
returns and more cash generated.
2.
From Bankers and Lenders:- Here cash is obtained by
borrowing in short-term such as overdraft or long-term such as
bank loans. Overdrafts are charged high on interest, although
bank loans can be agreed at a lower rate of interest. Long term
loans should be settled at the end of the agreed term while
overdrafts can be settled anytime the company has money to
pay. If banks have agreed for a certain period of loan, then they
cannot decide later to demand return earlier. They often agree
for loans based on an asset as security.
A viable plan for a firm would be to retain a higher portion of non- current
asset than its loan or approximately 1.5 times higher value of current assets
than its current liability. This mitigates potential risk of non-payment of
bank loans and keeps the business in a safe position.
Other than banks, other large companies issue debts in the form of
debentures where investors can buy and sell stock as loans. If it is agreed
that loan stocks cannot be redeemed, the yearly interest alone is payable.
Here the cost of cash is high and also greater tendency for the company to
become insolvent.
3.
Effective management of working capital :- The underlying principle
here is that the lower the inventories and debtors or the higher the
creditors, the more cash within the firm. A vital factor here is the loss of
opportunity when inventories are not sold. It just shows the performance
of the company to be under- performing. Another factor that plays a part
on increasing cash flow is by reducing debtor’s payment period.
However, again if there’s competition offering longer credit periods,
customers can easily balk a business and change its suppliers. Suppliers
can be requested longer periods of credit. However, they may agree only
if they manage to negotiate a higher price.
4. Selling a business:- When a company is unable to return the loans, they
tend to sell their business, wholly or partly. The hitch here is whether
someone will be willing to pay a high price for what they know you
want to sell. They are at higher bargaining power and one might be in
a position to sell out of compulsion. This is now acquisition takes place.
The cost in selling a business is where the business stops generating
cash from the part that is meant to be sold. So valuing this loss of cash is
the factor that determines the price you could sell the business for.
Forecasting and Managing Cash – Inflow, Outflow and Balance Sheet
Cash of a business could be managed efficiently if a plan is strategized
foreseeing the future of the firm’s growth. Owners should be able vision
the future to identity what they need to do now to gain foresee potential
success and mitigate risks that could hinder the way of progress.
Forecasting cash flow is a short term focus that looks at how the
business could manage in case of any unforeseen financial difficulties.
Although Cash management may be short term, it plays a vital role in
handling a situation of crisis in the business.
Cash Flow Management is the most essential part of accounting that
determines the success of a business. It is through this information that
a bank could approve a loan.
Chapter 14 The Difference Between Principles
And Rules
Despite them being called principles, generally accepted accounting
principles are very frequently seen as rules - but a clear distinction has to be
made between the two terms if we are to continue with explanations on
what each accounting principle is, why it exists, and how it should be
followed.
To begin with, the Financial Accounting Standards Board (which we will
continue to refer to as FASB) requires almost all companies to release
financial statements according to specific standards. In the case of FASB
(which is the authority for accounting standards in the United States of
America), these standards function as principles, rather than rules.
The principles are used according to where the company is and the exact
method they have chosen to follow when doing their accounting because, as
you might know already, there are many ways to do this: cash accounting
vs. accrual accounting, FIFO (First In, First Out) vs LIFO (Last In, First
Out) , and so on.
There is an ongoing debate that's been sparked in the accounting world on
whether rule-based or principle-based standards should be followed
- and this debate is especially important in the light of scandals such as
Enron.
What is the main difference between the two, though? Well, it goes like
this:
1.
Principle-based accounting is, probably, the most popular
method used around the world - and the reason most countries
have adopted this is because it is frequently better to adjust
accounting principle to the specificities of a company’s
transactions, rather than the other way around (adjusting the
company transactions according to a given set of rules).
The IFRS ( International Financial Reporting Standards) system is
principle-based as well. According to them, their system of standards
should help to make financial statements more readable, easier to compare
and understand, and more relevant to users.
The main advantage of following a principle-based standardization system
is connected to the fact that broader guidelines can very frequently be very
practical. In the absence of a principle-based system, accountants might be
forced to manipulate financial statements to fit into a very specific, given
set of rules and this might create not only a lot of stress but further (legal)
issues as well.
2. Rule-based accounting goes in the exact opposite direction of
principle-based accounting - meaning that it is comprised of a
list of (very) detailed rules. These rules have to be followed in
the creation of all financial statements that abide by rule-based
accounting.
For accountants, the rule-based system is frequently easier to use because
an absence of rules might have them facing court due to a bad judgment call
on financial statements they have produced.
The generally accepted accounting principles, which we will discuss over
the course, are, in themselves, a rule-based system used in the USA. Similar
systems exist in other parts of the world as well (such as the UK, for
example).
Generally accepted accounting principles are to be followed by companies
and their bookkeepers when financial statements are being produced. The
main goal of generally accepted accounting principles is to provide
investors, creditors, and other financial statement users with a way to
compare the information provided by different companies (or by the same
company when its financial statements are compared year by year).
The main advantage of the GAAP system (or any other rule-based system)
is that the potentiality of a lawsuit occurring as a result of a released
financial statement is lower than in the case of the principle- based systems.
Accuracy can be increased and potential errors and ambiguity can be
reduced by the use of the GAAP system.
The Issues with Both the Rule-Based and the Principle-Based Systems
Each of the aforementioned systems functions in its own way, providing
specific advantages. However, both of them have flaws as well, and the
main issue with both of the approaches is connected to the fact that there is
no universally adopted accounting method.
When doing business solely in the US, this is not a problem. However, with
110 countries abiding by the IFRS (principle-based) accounting standards
and the US being one of the few that uses the GAAP (rule- based) standard,
this might be a problem if you want to do business outside of the borders of
the United States of America.
When investments, mergers, or acquisitions take place involving parties that
use different accounting systems, a different lens has to be used. For
instance, Exxon and BP use different accounting methods, so halfway
solutions would have to be found.
On the one hand, critics of the principle-based system(s) claim that this kind
of method gives businesses too much leeway and they are not obliged to be
transparent. In this point of view, a rule-based system would make the
reports much more accurate when it comes to the financial health of a
business. On the other hand, rule-based methods have their flaws as well precisely because complex rules can create a lot of complications. This
system pushes bookkeepers to make businesses more profitable on paper,
precisely because there is a huge responsibility to the shareholders of that
business. Enron falls in this category, proving that a rule-based system can
lead to many issues as well. As a conclusion to this incursion into the
differences between rule- based and principle-based methods, one element
remains intact - the information provided in a company’s financial
statements has to be relevant and reliable at all times. Even more, it needs
to be easy to
compare (both from one accounting period to another and from one
business entity to another as well).
We might see the end of rule-based accounting in the United States of
America - but there is still a long and winding road to walk, as most
specialists agree that while the principle-based system might be better from
certain points of view, it also needs some serious alterations to prove
efficient.
Until then, though, GAAP remains the foundation of American accounting.
With its positives and its negatives, the generally accepted accounting
principles system is the most common bookkeeping standard in the US and
it will continue to be so - at least for the time being.
Following this, we will dive deeper into the core GAAP rules and what they
mean, what their “ruling” status is, and how to incorporate them in your
accounting.
Once done with that, we will proceed with alternatives to the GAAP system
as well - not because they have to be used at all times, but because we do
need to prove that generally accepted accounting principles are not to
always be used (and that, yes, not using them, can have further implications
as well).
Please keep in mind that this book aims to simplify these terms and explain
them in an easy way. Look at this resource as a helper in the art of
accounting at a beginner level, rather than an authoritative and very
detailed explanation of why certain rules exist and how they can be
followed.
GAAP is not about legislation per se - but it is tightly-knit into actual
legislation. In general, following generally accepted accounting principles
is meant to help you follow legislation and avoid further issues that would
derive from not doing so. There are, however, exceptions to the rules because even laws themselves frequently allow for little escapades (which
frequently generate not-so-little scandals).
Whenever you can, however, you should adhere to the GAAP rules. They
are there to help you navigate the intricate paths of American legislation in
the financial sector, helping you, as an accountant, owner, or manager,
better handle the financial statements you release to the public and avoid
serious implications on a legal level.
Chapter 15 Key Financial Statements
Financial statements are, ideally, a record of all transactions and
financial activities that took place within a fiscal year. The statements
are a representation of the financial performance, strength, and
liquidity of a company. Notably, there is no financial statement that is
more important than another. All statements must be used together to
make conclusive inferences about the position of a company. First
things first, why are financial statements important, and who are their
users?
Users of Financial Statements
Typical financial statements have very many users, some of whom
include:
The Management
Any company official is interested in the manner through which the
company is operating and, most certainly its financial position. As is
evident, all companies are in the market for the sole purpose of
making profits. Therefore, it would be in the best interest of any
manager or company owner to run a business that s stable and is
making profits. The only way through which the company can know
how it performed is through the analysis and evaluation of the final
books. Making a profit and being financially stable is the most
appropriate situation, and the management is able to determine this
from the financial books.
Investors
One of the golden rules of money is that you must always attempt to
invest in a place where you are sure that you will reap benefits in the
future. When companies go public, it is an investment opportunity, and
most investors will most likely try to seek the viability of the
opportunity to see if it is feasible enough for them. The only way
through which they can make a conclusive judgment is if they
thoroughly check the financial documents to ensure the extent to
which the company is stable. The financial statements also contain
non-financial information that helps investors make further decisions.
Such information includes competitors, government policies and other
external industrial factors. In as much as such information may seem
trivial, the truth is that it really affects the positioning and
functionality of the company to a very large extent and maybe a major
determinant concerning the level to which the company will succeed.
Competitors
There are competitors in every industry. Competitors are major drivers
in every industry since the fact is that all companies fight for the same
end consumers. The profitability of any company is determined by its
competitive advantage, and the more competitive it is, the higher the
chances of getting and retaining clients. Note that financial statements
are not private. Most companies are required to publish all of their
final books of accounts in gazettes and report them accurately. Any
member of
the public has access to these books. Therefore, competitors tend to
analyze each other’s final books of accounts and compare them with
their personal ones to try and gauge the level to which such
competitors are above them. For example, a competitor may be
interested in the number of sales and revenue that a company got from
a particular product. If the sales are much higher than what they
managed to achieve, it may be time to call a board meeting to
determine what is being done wrong and what can be improved. Also,
some statements contain an analysis of the future prospects of the
company, and the competitors can steal ideas therein.
Government
The government is undoubtedly one of the major enthusiasts and users
of financial statements. One of the major reasons as to why they keep
so many tabs on companies is to review the taxes and predict future
tax prospects. For example, if most companies in a certain industry
continue showing upward growth, it is a sign that the government can
expect to collect more taxes. Likewise, when most companies are
seemingly collapsing and making losses, the government can expect
reduced remittance in the next financial year. A review of different
countries’ financial books has been a contributor to changed
government policies in some instances. When companies are
collapsing, the government is able to conduct more studies to help
reveal why such an occurrence is prevalent, and if it is something that
they can control, they do so. In a perfect setting, the government
would wish for all companies and businesses to be
performing well.
Employees
Employees are also considered to be critical users of financial
statements for the main reason that the performance of the company
directly affects them. Whenever a company is not doing well,
employees should be very careful since there they can potentially lose
their jobs. Likewise, when a company is doing well, the employees
will be motivated to do even better, and the peace of mind through the
knowledge that their jobs may be secure helps immensely.
Currently, there is an upcoming project management and governance
model known as agile, whose basis is the involvement of employees in
all company functions. In this case, the employees are mandated to
take full responsibility for the performance of the company, and they
have to scrutinize the books to determine why the performance is as
revealed.
Lenders
One of the things that lenders try to avoid as much as they can is
suffering bad debts. Bad debts are a very common occurrence, and the
fact usually is that there is no way that the lenders can recover the
amount owing. To prevent this extremity, lenders always try to ensure
that they properly scrutinize potential lenders to determine the level to
which they can be assured that the debt will be repaid. Stable
companies have a very high likelihood of payment, while struggling
companies may just end up not paying at all.
Suppliers
Just like the lenders, suppliers often need to know the possibility of the
company paying them for goods supplied. As is common in most
companies, suppliers use their own money to serve tenders and other
supply needs, and they are paid in bulk on a pre-determined basis. In
case the companies fail to pay them, the suppliers end up losing stock
as well as the capital used to finance the business. Supplies may run
into millions of dollars, which means that failure to pay potentially
crushes such persons. Therefore, there is always a need to carry out
due diligence to prevent such potential eventualities.
General Public
The general public is also a major user of financial statements. There
are so many other groups of people who have varied reasons for
seeking books, and no one can stop them from accessing such
information. For instance, students may be involved in different types
of research, warrantying the need for the statements. Also,
entrepreneurial enthusiasts may go through different accounts just to
try and seek any information that may help them to make conclusive
decisions about how they should proceed in their quest.
Types Of Financial Statements
Financial statements are written accounting records that represent an
entity’s financial activities, thereby showcasing their strengths,
liquidity, and (Weil, Schipper, & Francis, 2013). The financial
statements comprise a summary of the strength, performance, and
liquidation status of a company. It is mandatory for every company to
create these financial statements at the end of every fiscal year. The
three main financial statements are;
Balance sheet
The balance sheet is also known as the statement of a financial
statement. This statement illustrates the financial position of an
organization at a given time. This statement is usually prepared at the
end of an accounting period and is prepared using the historical cost
principle.
The key elements of the balance sheet are assets, liabilities, and equity.
Assets refer to the tangible and intangible resources that are owned by
the company. Liabilities, on the other hand, refer to the company’s
obligations. Finally, equity refers to what an organization owes its
owners, and is the difference between the assets and the liabilities.
The balance sheet follows the accounting equation, and it must always
balance. Before you prepare a balance sheet, there is always a need to
prepare a trial balance first, identify and summarize all the accounts
involved, and finally prepare the book.
A sample balance sheet is as illustrated in figure 1
Figure 1: Illustration of a balance sheet
As you can see, the three elements of accounting are clearly
illustrated. There are assets, liabilities, and owner’s equity. Note that
there are many transactions that occur in a typical company, and the
truth is that not all of them are illustrated in the balance sheet. Keep in
mind that the balance sheet items only include the three elements of
accounting. Therefore, you may want to begin by identifying all of the
fixed and current assets, short- and long-term
liabilities, and the owners’ equity.Ultimately, the figures must balance.
In this case, the balancing amount is $186,500
Also, note the manner in which the balance sheet is prepared. The title
is always centered and written in three lines. The first line is the name
of the company, the second line an illustration that it is a balance sheet,
and the third line the accounting period. That is the order, and you must
always abide by it.
Income statement
The income statement is also referred to as the profit and loss
statement, which ideally showcases the performance of the company
through the analysis of the net profit or loss realized.
The key elements in the statement are incomes, which represent what a
company has earned over a particular time and expenses, which
illustrate the costs incurred by the business over a certain period. The
difference between incomes can either be positive or negative, where
the former indicates profits while the latter indicates losses. An
illustration of a profit and loss statement is as illustrated in figure 2
Figure 2: Illustration of an income statement
Just as with the balance sheet, the heading has three lines. To properly
prepare an income statement, keep the following pointers in mind;
The fact that the statement is referred to as a profit
and loss account is an illustration that its main role is
to determine whether a company made profits or
losses in a certain period.
To get the final figure, deduct expenses from
revenues. A positive balance denotes a profit while a
negative balance denotes a loss.
Always use the accrual basis of accounting when
preparing the income statement.
Cash Flow Statement
The cash flow statement summarizes the flow of cash and cash
equivalent, and show the movement of cash over a specified period of
time. The term cash and cash equivalent mean “similar to,” which
means anything that can be compared to cash. Some popular examples
of cash and cash equivalent are:
Stocks
Certificates of deposit
Shares
Once you have identified all of your cash and cash equivalents, you
can proceed to prepare this financial statement.
The key elements of the statement are operating activities, investing
and financing activities.
Operating activities are the revenue generation
activities that include activities such as the sale and
purchase of goods and services. Therefore, they are
activities that serve as the main revenue-generating
processes. To put it simply, the revenue-generating
activities are the sole reason for which the company
was created. For instance, if you have a t-shirt selling
shop, the operating activities will revolve around
buying raw materials and selling the shirts on either a
cash or credit basis.
Investing activities are those activities that have the
intention of generating income in the future, such as
the purchase and sale of long-term assets. Many
companies do not only operate within themselves, and
they buy stocks and shares from other companies to
increase their stability.
Finally, financing activities represent the acts that
influence cash flow from the company’s securities.
Any financing activity is mostly centred on the
movement of cash for the sole purpose of financing
all of the business operations.
These are the main financial statements that are released by a typical
company. However, there are other small statements that may either be
prepared or not depending on what the company wants to evaluate.
Some of the minor accounts include the statement of shareholders'
equity as well as general reports.
Chapter 16 Common Terms Used in
Accounting
Account: An area in a ledger that is reserved for the recording of
specific types of business transactions. For example, all expense
transactions will be recorded in the Expenses account.
Accounting: The professional practice of posting bookkeeping records
into a ledger, balancing accounts, and producing financial statements.
Accounting Cycle: The complete cycle of processing bookkeeping
records, from recording transactions in journal to producing financial
statements. The accounting cycle has six steps.
Accounting Equation: The basic accounting equation is Assets =
Liabilities + Owners’ Equity. The accounting equation is used to ensure
that records in a double-entry accounting system are balanced.
Accountant: The professional practice of processing and evaluating
bookkeeping records. Sometimes used interchangeably with
“bookkeeper.”
Accounts Payable (A/P): All records that show the amount of money a
company owes for goods and services, which it has not yet paid.
Accounts Receivable (A/R): All records that show the amount of
money owed to a company for goods and services, which it has not
yet received.
Accrual Accounting: An accounting method that recognizes and records
income and expenses at the time they are incurred, instead of at the time
they are paid.
Assets: All items owned by a company that represent value to the
business.
Bad Debts: Unpaid sales invoices for goods and services already sold
that the company has written off as an expense.
Balance Sheet: A financial report that provides information about a
company’s value. The balance sheet shows the value of a company’s
assets, liabilities, and equity at a specific point in time. The balance
sheet is one of three reports that comprise financial statements. The
other two reports are the income statement and the cash flow statement.
Budget: A detailed financial plan for future business activities.
Capital: Funds or other forms of fixed assets that have been invested into
a business to enable operations
Cash Accounting: An accounting method that recognizes and records
income and expenses at the time they are paid, instead of at the time
they are earned or incurred.
Cash Flow: The record of how the money generated by a business is
managed. Cash flow statements show how the business owners
spend the money generated by operating and non-operating activities. Chart
of Accounts: A list of all the financial accounts contained in a company’s
general ledger. All accounts belong to one of five main categories: Assets,
Liabilities, Equity, Revenue, Cost of Goods Sold, and Expenses. Each
individual category contains several accounts to record specific types of
transactions.
Closing Balance: The final balance of a ledger account at the end of a
business day or bookkeeping or accounting cycle.
Coding: The practice of classifying transactions according to the chart of
accounts.
Contra: A type of ledger account that allows accountants to counterbalance
entries. For example, the Allowance for Bad Debts account is a contra
account that allows accountants to resolve discrepancies in the Sales
Revenue account.
Cost of Goods Sold: The money spent by a company to purchase inventory
items for retail sales. This value can also refer to the cost of raw materials
purchased for the manufacture of products for resale.
Credit: Accounting entries that occupy the right side of a double-entry
ledger. Credits increase the value of income, liability, and equity accounts
and decrease the value of asset and expense accounts.
Credit Note: A transaction record issued when money is refunded to a
customer.
Creditor: Anyone who lends money or extends credit.
Data: All of the information recorded in journals and ledgers.
Debit: Accounting entries that occupy the left side of a double-entry
ledger. Debits decrease the value of income, liability, and equity
accounts and increase the value of asset and expense accounts.
Debtor: Anyone who borrows money.
Deductible: Any business purchase that can be recorded in the
business’s expense account.
Depreciation: The practice of recording the cost of purchasing fixed
assets over their entire useful life.
Double-Entry: Double-entry accounting requires two entries for every
transaction—a debit entry and a credit entry. Accountants must ensure
that the value of all debit entries equals the value of all credit entries for
every accounting cycle.
Drawing: An account that records payment of the owner’s salary.
Entry/Entries: A single transaction recorded in a company’s ledger.
Equity: The amount of financial interest the owner and/or shareholders
have in a business. Equity is the difference between the value of assets
and liabilities.
Expense: Any business purchases that support operations.
Financial Statements: Specific types of financial reports that Show
investors, managers, and regulators the financial health of a company. The
three types of financial statements are the balance sheet, income
statement, and the cash flow statement
Fiscal Year: A period spanning 12 consecutive months and that
constitutes an entire accounting cycle. A fiscal year can begin in any
calendar month.
Gross Profit: The value of a business’s income that remains after
subtracting the cost of goods sold.
Income: All of the money earned by a business, either through the sales
of goods and services, or through interest earned and investments.
Inventory: Items owned by a company that are available for sale.
Invoice: A document that provides the details of purchases, such as the
goods or services purchased, the purchase date, and the purchase
amount.
Journal: A chronological record of daily business transactions
maintained by a bookkeeper. Also known as the book of original entry.
Ledger: The volume to which journal transactions are posted by the
accountant; the permanent record of daily business transactions,
organized by account type.
Liability: All of the money that a company owes.
Loan: Money given to a company or person on the condition that it
will be repaid according to specified terms, usually with interest.
Loss: A financial result that occurs when expenses are greater than
income. The opposite of profit.
Net Profit: The value of all money earned by a company from operating
and non-operating activities, calculated by subtracting the cost of
expenses from gross profit.
Opening Balance: The balance of a ledger account on the first day of a
financial period.
Payable: A type of expense account that records the amount of money
due to be paid by a business.
Payroll: The financial account that records all transactions related to
employee wages.
Petty Cash: A financial account that records transactions for minor
purchases.
Profit: A financial result that occurs when income is greater than
expenses. The opposite of loss.
Purchase: The buying of goods, services, or assets.
Quote: An official estimate of the amount of the cost of goods or
services.
Receipt: A document issued to a customer after a purchase that shows
the details of the sale.
Receivable: A type of asset account that records the amount of
money due to be paid to a business.
Reconcile: The accounting practice of matching balances from one
document to another.
Recurring: Any transaction that takes place on a regular, repeating
basis, such as a monthly utility bill.
Refund: Money that returned to customers as a result of a dispute, an
overpayment, or some other reason.
Reimburse: A payment made to compensate for some type of loss.
Salary: A fixed, predetermined sum of money paid by an employer for
an agreed period in exchange for work.
Sales: All money received as a result of goods or services purchased by
customers.
Single-Entry: A method of recording transactions in which the
transactions are only listed once.
Software: Any type of computer program. Accounting software
includes QuickBooks, which automates many accounting tasks.
Statement: A financial report that displays information, such as a bank
statement.
Transaction: Any type of business activity that requires a transfer of
funds.
Transfer: The movement of monetary funds from one account to
another account. Undeposited Funds: An asset account that shows the
amount of money that a company has received but has not yet been
deposited into the bank.
Withdrawal: A transaction in which money is taken out of a financial
account.
Write-Off: An accounting transaction that officially recognizes that a
specified amount of money that is due to be paid will not be received.
Year-End: The period of financial accounting activity that occur at the
end of a fiscal year.
Conclusion
One of the most significant aspects that need to be included in your
planning will be your budget. It does not matter if you are a small
freelancing business with no employees or a big corporation with
thousands of employees. The point is, if you are going to have a
business, no matter how big or small it may be; the budget is a key
aspect.
Besides the question of how you are going to finance your business, the
question also arises of how you are going to spend the money to help
your business grow. That is where budgeting comes into play. The great
thing about creating a budget is how it allows for you to predetermine if
you will have enough financing for your business and all the expenses.
There are a few different areas we need to cover. Knowing how you are
spending the money is only part of the battle. You also need to know
how to create the budget and manage the budget once it has been
created.
Creating a Spending Plan:
Creating a spending plan is an essential part of creating your budget.
The information you gather for the spending plan will be used for
forming the budget. This process comes with four steps you must
follow.
Step 1 – Identify Income: Take the time to identify all your income that
will be or is coming into the business.
Step 2 – List Expenses: Take the time to review your expenses your
business may have. While you are at it, create an expense tracker for easy
access to all your expenses.
Step 3 – Compare Your Income and Expenses: Look at your income and
expenses and see how much income you got to work with and the expenses
that must be paid with that income.
Step 4 – Set Priorities and Make Changes: As you go through your income
and expenses, set your priorities. Each business will have different priorities
based on the type of goods or services they offer. Therefore, make sure
these are customized to fit your business.
Preparing Your Budget
Many businesses think they can search for a template for a budget and just
fill in the information. This is a good start when looking for a good format.
However, that is not catered to your business. There are an additional four
steps for you to follow that will help you prepare your budget.
Step 1 – Identify Your Goals: You must have some type of goals for your
business. Start by identifying them as you prepare for your budget. I like
making a space for the goals on the budget sheet directly. This way it is a
constant reminder of what my goals are.
Step 2 – Review What You Have: Take the time to review all the
information you have collected and revise it if needed. This is a process that
takes a step back for one last review of the spending plan.
Step 3 – Define Your Costs: As you go through each expense you must
start to determine the cost of each line that will be on your budget.
Step 4 – Create Your Budget: Finally, it is time to create your budget.
You can do this by hand or on the computer. I like using Excel as it
makes it easy to format and review each budget from month to month.
This is where you will start to put those costs in writing. If you do this
by hand, make sure to use a pencil in case you need to change anything
on the budget.
Managing Your Budget
Once you have created your budget and are ready to rock n roll, now
you need to manage this report. One thing to keep in mind when you
are managing your budget is how the previous steps are like an endless
circle. You will find that you are continuously revising and working on
your budget as your business is active.
Step 1 – Set Goals: These goals should be set from the beginning. Have
a place for them to be listed right on your budget sheet. However, your
goals will not stay the same throughout the lifespan of your business.
As the business grows, so will your goals. Always review your goals
each month as you prepare the next budget and ask yourself, “Are my
goals still the same or is there something I need to change?”
Step 2 – Calculate Your Income and Expenses: Every month you need
to calculate your income and expenses. They may not be the same from
month to month. Maybe you took on a new expense or started getting
more sales.
Step 3 – Analyze Your Spending and Balance Your Checkbook: Take the
time to analyze and see where you are spending the business income. Make
sure you are balancing your checkbook and reconciling it with your records.
Step 4 – Revisit Your Original Budget: Always look at the original budget
or the previous budgets that have been prepared. Perhaps you have already
revised the original budget, look at the last revision and compare it with all
the budgets that have been prepared and the original budget. Ask yourself,
“How are they different?” If you notice more income during one month
after the expenses have been deducted then ask, “What did I do differently
at that time?”
Step 5 – Commitment: One of the key elements is your commitment to the
budget you created. I have seen too many companies fail because they do
not commit to follow their budget.
Step 6 – Wants vs Needs: So many times there are things we want for our
business, but we do not need them. On the other hand, there are things we
need for the company to help us grow and expand. A great philosophy in
handling this is, “Think about it seven times and ask yourself; do you need
it for the growth of your company or do you want it?” Maybe later as your
company is growing, you may be able to start adding some of your wants
into the budget. However, do this gradually and as you can afford it as the
company grows.
Step 7 – Seasonal Expenses: Think about what your business does.
Do you have seasonal expenses? You will need to add this to your budget
during those months the extra expenses occur.It is essential that you fully
understand the process of budget planning and the preparation system. Once
you have created your first budget, the rest will become easier to manage
and create through revisions.
TIPS AND TRICKS TO GET SMALL
BUSINESS ACCOUNTING RIGHT
Mаking miѕtаkеѕ in уоur ассоunting саn have ѕеriоuѕ imрliсаtiоnѕ fоr any
buѕinеѕѕ, such as ѕignifiсаnt finеѕ fоr ѕuѕресtеd tаx еvаѕiоn. Fоr a lаrgе
соrроrаtiоn, this саn damage bоth the finances аnd thе reputation of thе
company. Fоr a small buѕinеѕѕ hоwеvеr, it саn hаvе a hugе imрасt and
possibly еvеn саuѕе the соmраnу tо gо undеr, if there iѕ nоt еnоugh money
to pay the finеѕ.
Gооd accounting iѕ thеrеfоrе еѕѕеntiаllу right from thе vеrу ѕtаrt. Mаnу
small business оwnеrѕ bеliеvе thаt they dо not nееd tо dо аnу kind оf
ассоunting, оr dо оnlу bаѕiс bookkeeping, but thiѕ iѕ wrong. It iѕ сritiсаl for
еvеrу buѕinеѕѕ, nо matter itѕ ѕizе, tо ѕtаrt ассоunting frоm the moment it
starts trаding. Simрlу kеерing hоld of сuѕtоmеr rесеiрtѕ аnd invоiсеѕ is not
еnоugh, the business must ѕеt up a simple but thоrоugh system to rесоrd аll
transactions made аnd tо рrоduсе rероrtѕ as аnd whеn nееdеd. Getting оff
tо a gооd ѕtаrt with ассоunting will set уоur buѕinеѕѕ up fоr long-term
success.
When уоu lаunсh уоur ѕmаll business, ореn a ѕераrаtе bаnk ассоunt fоr it.
It iѕ not unсоmmоn for ѕоlе trаdеrѕ fоr еxаmрlе tо simply uѕе thеir personal
сhесking account for their buѕinеѕѕ but this thеn mаkеѕ it imроѕѕiblе, оr at
lеаѕt еxtrеmеlу difficult and time-consuming, tо carry оut a reconciliation,
which iѕ a сhесk to еnѕurе that thе figurе your bооkkеерing tells уоu ѕhоuld
be in thе ассоunt is indееd thе аmоunt in the ассоunt.
Reconciling your bооkѕ and ассоuntѕ rеgulаrlу, ѕuсh as weekly оr mоnthlу,
is a great way to avoid ассоunting errors. Thiѕ wау if thе figures do not add
uр you will hаvе more chance оf bеing аblе tо correct the miѕtаkе. Imagine
trying tо find a ѕmаll rесеiрt from tеn mоnthѕ ago, for еxаmрlе. Thаt iѕ thе
kind оf problem thаt саn occur аnd be imроѕѕiblе tо соrrесt if you оnlу
сhесk уоur books аgаinѕt уоur bank right bеfоrе уоu hаvе tо submit your
annual tаx return.
Gооd bookkeeping аnd ассоunting ѕuсh аѕ рrоduсing monthly cash flоw
statements nоt оnlу bеnеfitѕ you when it соmеѕ tо ѕubmitting уоur tаx
return, whiсh is muсh easier when you hаvе аll оf thе necessary figures and
dосumеntаtiоn аlrеаdу in рlасе, but it аlѕо benefits you because you саn ѕее
if уоu аrе оvеrѕреnding on раrtiсulаr itеmѕ or ѕеrviсеѕ, аnd рrеdiсt whether
уоu will mаkе a рrоfit or lоѕѕ. Yоu can аlѕо start to ѕее trеndѕ, ѕuсh аѕ
ѕеаѕоnаl inсrеаѕеѕ аnd dесrеаѕеѕ in рrоfit, which may оthеrwiѕе have gone
unnоtiсеd.
Anоthеr great tiр iѕ tо find оut if you аrе еntitlеd tо аnу tаx сrеditѕ аѕ a
small buѕinеѕѕ оwnеr. Too mаnу small соmраniеѕ dо not realize thаt they
mау bе аblе to сlаim certain еxреnѕеѕ such as trаvеl, hоmе оffiсе costs and
еvеn childcare аѕ untаxеd. Bе ѕurе tо dо your rеѕеаrсh tо mаkе ѕurе you аrе
not оvеrрауing.
For ѕmаll businesses whо wаnt tо keep thеir accounts in good order but
who реrhарѕ dо nоt hаvе thе еxреrtiѕе needed tо dо thеir own ассоunting,
thеrе are a соuрlе of орtiоnѕ tо сhооѕе frоm. It is роѕѕiblе to buу
accounting ѕоftwаrе online that will рrоduсе rероrtѕ for you. Thеѕе аrе
rеlаtivеlу сhеар аnd еаѕу to use, hоwеvеr thе rероrtѕ аrе only as good аѕ
thе figurеѕ уоu еntеr intо thеm ѕо if you mаkе аn еrrоr, it is likеlу tо gо
unnoticed.
Hiring a ѕmаll buѕinеѕѕ accountant, hоwеvеr, еnѕurеѕ thаt your ассоuntѕ
will be рrераrеd bу a knоwlеdgеаblе аnd еxреriеnсеd реrѕоn whо рауѕ
meticulous attention tо detail. You can орt fоr a lосаl ассоuntаnt or, to kеер
соѕtѕ dоwn, you саn find аn ассоuntаnt оnlinе whо gеnеrаllу charge lower
fееѕ.
It wоuld bе highly recommended to аnу small buѕinеѕѕ tо hire a ѕmаll
buѕinеѕѕ ассоuntаnt as a соnѕultаnt right frоm thе ѕtаrt оf thе рrосеѕѕ,
whiсh givеѕ thеm timе tо fаmiliаrizе themselves with уоur buѕinеѕѕ bеfоrе
thе buѕу period аt the end оf thе tax уеаr. However, you wаnt to еnѕurе that
you аrе wоrking with аn accountant whо understands уоur роѕitiоn аnd саn
аdviѕе оn hоw best to handle your finances, ѕо wherever роѕѕiblе opt fоr
ѕоmеоnе who ѕресiаlizеѕ in small buѕinеѕѕ ассоunting and, preferably, whо
has аlrеаdу wоrkеd with small businesses thаt аrе in thе ѕаmе induѕtrу as
уоu are. If уоu livе in a lаrgе city, accountants tend to bе readily аvаilаblе
with the nесеѕѕаrу bасkgrоund, but if nоnе of уоur lосаl ассоuntаntѕ саn
offer whаt уоu nееd, thеn it wоuld bе best to find one оnlinе, rather than opt
for ѕоmеоnе who only knоwѕ hоw lаrgе соrроrаtiоnѕ wоrk.
GLOBALIZATION AND ACCOUNTING
Aссоunting in the United Stаtеѕ iѕ very imроrtаnt. Evеrу buѕinеѕѕ relies оn
accountants tо kеер trасk оf money in accounts fоr the business. But, Is
there аnу laws though whеn it соmеѕ tо ассоunting? Is there аnу
rеgulаtiоnѕ? Evеrу ассоuntаnt'ѕ firѕt thought is the Gеnеrаllу Aссерtеd
Accounting Prinсiрlеѕ (GAAP). Thеѕе аrе guidеlinеѕ that finаnсiаl
accountants use in any jurisdiction. Thеѕе guidеlinеѕ ultimаtеlу lead to thе
completion of the finаnсiаl statements. Thе Unitеd Stаtеѕ hаѕ itѕ own
рrinсiрlеѕ but this does nоt mеаn other countries follow thе ѕаmе principles.
Diffеrеnt рlасеѕ such аѕ thе French hаvе аdорtеd a different set оf
рrinсiрlеѕ in whiсh thеу bеliеvе iѕ thе way accounts ѕhоuld be handled.
Other соuntriеѕ use аnоthеr ѕеt of рrinсiрlеѕ thаt аrе саllеd Intеrnаtiоnаl
Finаnсiаl Reporting Stаndаrdѕ (IFRS).
Firѕt, I will tаlk about thе US; Amеriсаѕ GAAP. Thе USA рiсkеd up thе
GAAP in 1959. When diѕсuѕѕing the uѕе оf GAAP in thе USA thеrе аrе a
couple objectives that muѕt аррlу when рrеѕеnting financial statements. Thе
first iѕ it ѕhоuld bе useful аnd hеlрful tо рrеѕеnt tо роtеntiаl invеѕtоrѕ аnd
creditors whеn making finаnсiаl dесiѕiоnѕ. At thе same timе thе infо muѕt
also be hеlрful tо investors аnd сrеditоrѕ. Anоthеr оbjесtivе iѕ thе
infоrmаtiоn ѕhоuld bе hеlрful in mаking financial аnd long-term dесiѕiоnѕ.
Finаnсiаl infоrmаtiоn should also hеlр in buѕinеѕѕ реrfоrmаnсе аnd ѕhоuld
bе uѕеful fоr kеерing rесоrdѕ оrgаnizеd.
Tо асhiеvе thеѕе оbjесtivеѕ there are аlѕо 4 assumptions thаt аrе mаdе. Thе
first is business еntitу, whiсh аѕѕumеѕ personal еxреnѕеѕ ѕhоuld be ѕераrаtе
from revenues аnd expenses. The ѕесоnd аѕѕumрtiоn is going соnсеrn,
whiсh аѕѕumеѕ thе buѕinеѕѕ, will be in operation indefinitely. Thе third iѕ
thе monetary unit рrinсiрlеѕ, which assumes сurrеnсу will bе thе unit оf
rесоrd. Thе lаѕt assumption is thе timе реriоd рrinсiрlе. This simply
аѕѕumеѕ thаt есоnоmiс асtivitiеѕ can be dividеd intо separate timе periods.
Juѕt like lаwѕ and rightѕ, diffеrеnt раrtѕ оf thе world hаvе adopted thеir own
principles whеn it соmеѕ to рrеѕеnting finаnсiаl information. Onе еxаmрlе
is thе Frеnсh GAAP. Thе French GAAP rеԛuirеѕ ѕimilаr objectives and
principles tо the USA but аt thе ѕаmе time it iѕ vеrу diffеrеnt. They rеԛuirе
a rеviеw оf the рrinсiрlеѕ аnd соnсерtѕ of ассоunting, a definition оf bаѕiс
соnсерtѕ ѕuсh аѕ inсоmе ѕtаtеmеnt, bаlаnсе ѕhееt, liаbilitiеѕ, еtс. Their
GAAP аlѕо provides rulеѕ оf ассоunting, descriptions оf ассоunting
documentation аnd a ѕummаrу оf ѕресiаl accounting rulеѕ. There аrе
differences in how the Frеnсh ѕераrаtе they're ассоuntѕ tоо. Thеу hаvе 8
classes оf ассоuntѕ in whiсh they оrgаnizе their ѕtаtеmеntѕ. The firѕt 5
classes are the bаlаnсе ѕhееt ассоuntѕ whiсh include liаbilitу, аѕѕеtѕ, stocks,
third раrtу, аnd financial accounts. Clаѕѕеѕ 5-7 inсludе рrоfit аnd lоѕѕ
ассоuntѕ аnd the last account consists оf ѕресiаl ассоuntѕ.
Not аll counties have GAAP's. Some соuntriеѕ and buѕinеѕѕеѕ follow
ѕоmеthing саllеd thе IFRS оr the intеrnаtiоnаl financial reporting ѕtаndаrdѕ.
Thiѕ wаѕ designed аѕ basically аn accounting language in which every
buѕinеѕѕ understands асrоѕѕ the glоbе. Cоmраniеѕ thаt dеаl with multiple
intеrnаtiоnаl businesses gеnеrаllу uѕе thеѕе standards. IFRS finаnсiаl
ѕtаtеmеntѕ соnѕiѕt оf a ѕtаtеmеnt оf finаnсiаl position, a ѕtаtеmеnt оf
соmрrеhеnѕivе income, a statement of changes in еԛuitу, and a statement оf
саѕh flоwѕ. Similаr tо thе GAAP the IFRS uses assets, liаbilitiеѕ аnd аѕѕеtѕ
аѕ elements whеn рrераring finаnсiаl ѕtаtеmеntѕ for a buѕinеѕѕ. General
fеаturеѕ of IFRS consist оf thе going соnсеrn рrinсiрlе, ассruаl bаѕiѕ
ассоunting, frеԛuеnсу оf rероrting (rероrtѕ tо bе mаdе annually),
соmраrаtivе infоrmаtiоn аnd consistency оf the rероrtѕ (reports should bе
аttаinеd оnе period after аnоthеr). Thеrе аrе a few diffеrеnсеѕ between
GAAP аnd IFRS. First of аll, GAAP is mоrе оf a "rulе bаѕеd" ѕуѕtеm whilе
IFRS iѕ a "рrinсiрlе bаѕеd" concept. Anоthеr diffеrеnсе iѕ hоw each set of
ѕtаndаrdѕ hаndlеѕ invеntоrу costs. For GAAP, the LIFO (Lаѕt in, firѕt оut)
оr FIFO(firѕt in firѕt оut) methods are аllоwеd tо be used whеn dealing with
invеntоrу costs. Fоr IFRS thоugh, FIFO is rесоmmеndеd while LIFO
ѕhоuld nоt be uѕеd. Alѕо with invеntоrу, if inventory iѕ written dоwn, fоr
thе IFRS, thе write up mау bе rеvеrѕеd if сеrtаin сritеriа'ѕ are mеt. GAAP
dоеѕ not allow rеvеrѕаlѕ of writе- uрѕ."Rulеѕ" for ассоunting internationally
are ѕimilаr tо hоw wе handle сulturе and bеliеfѕ. What wе may bеliеvе in
this country mау bе thе орроѕitе оf whаt аnоthеr соuntrу may bеliеvе. Iѕ
thеrе a right bеliеf? Nо. Just like thе рrinсiрlеѕ аnd ѕtаndаrdѕ of ассоunting,
thеrе iѕ nо right way tо do it. It iѕ аll аbоut how a country реrсеivеѕ how
ассоunting ѕhоuld be handled. As lоng аѕ the information gets оut thеrе in
an оrgаnizеd wау, thеn еithеr method iѕ thе right method.
FLAWLESS & PROFITABLE BUSINESS
ACCOUNTING
It iѕ еѕѕеntiаl for аll thе buѕinеѕѕ оwnеrѕ tо diѕсеrn hоw рrоfitаblе аnd
mоnеу mаking they are аt аnуtimе. In tоdау'ѕ world оf business thе
соnvеntiоnаl wауѕ оf annual accounting iѕ сеrtаinlу inаррrорriаtе аnd
раrtiсulаrlу when it соmеѕ to securing success fоr ѕmаll buѕinеѕѕеѕ, small
buѕinеѕѕ ассоunting iѕ оf utmоѕt importance. Nevertheless, thе finаnсiаl
mаttеrѕ whiсh are linkеd with small businesses are quite different frоm thаt
of lаrgе оr huge buѕinеѕѕ hоuѕеѕ аnd undеrѕtаting thеѕе mаttеrѕ аѕ wеll аѕ
ассоunting is еxtrеmеlу crucial fоr thе аррrорriаtе аdminiѕtrаtiоn of thе
small buѕinеѕѕеѕ. Thiѕ understanding furthеr leads tо right аllосаtiоn оf
асknоwlеdgmеnt, соrrесt business асtivitiеѕ, ѕuitаblе use of fundѕ,
еnhаnсеd dесiѕiоn mаking аnd арt еvаluаtiоn оf the competitors.
Thе Small Business Aссоunting еѕѕеntiаllу includes three major financial
measures- Profit аnd Loss Stаtеmеnt, Bаlаnсе Shееt and the Cаѕh Flow
Stаtеmеnt. Thе Prоfit аnd Lоѕѕ Stаtеmеnt illuѕtrаtеѕ whether thе business at
small scale iѕ mоnеу making оr nоt. Thiѕ ѕtаtеmеnt is a tеѕtimоniаl that
ѕреаkѕ thе truth аbоut thе buѕinеѕѕ i.е. hоw thе buѕinеѕѕ iѕ gоing on аnd
furthеr соvеrѕ certain time реriоd, either ԛuаrtеrlу or monthly.
Whilе thе Bаlаnсе Sheet ѕhоwѕ thе wоrth оf thе business. It is thе ѕtаtеmеnt
whiсh lists all the liabilities аѕ wеll as аѕѕеtѕ оf thе buѕinеѕѕ аt a specific
point оf timе. Thе Cаѕh Flow Stаtеmеnt givеѕ an idea rеgаrding the future
саѕh bаlаnсе of thе buѕinеѕѕ аt ѕmаll ѕсаlе. It iѕ thе ѕtаtеmеnt thаt covers
thе uрсоming period оf time and thereby predicts thе future сарitаl
rеԛuirеmеntѕ оf the small business еntеrрriѕе рriоr tо the nесеѕѕitу асtuаllу
аriѕеѕ.
Thеrе аrе two рrimе mеthоdѕ of Small Buѕinеѕѕ Aссоunting inсluding the
Cаѕh Bаѕiѕ method and thе Aссruаl Mеthоd.
In Cаѕh Bаѕiѕ ассоunting method the bill рауmеntѕ аrе асknоwlеdgеd аѕ
expenses and саѕh receipts аrе асknоwlеdgеd аѕ income. Vаѕt mаjоritу оf
the ѕmаll business рrорriеtоrѕ' uѕе this business ассоunting method since it
is еаѕу to understand аѕ wеll аѕ imрlеmеnt.
In thiѕ mеthоd thе entry of revenue in ассоuntѕ dо not depends uроn thе
асtuаl compilation of саѕh. At any timе when thе рrоduсt or service is sold,
thе transaction iѕ recorded within the ассоuntѕ аѕ ассоuntѕ rесеivаblе, еvеn
in thе саѕе if the client has not given thе price. When thе rеvеnuе асtuаllу is
rеаlizеd thеn thе account rесеivаblе gеtѕ соnvеrtѕ into саѕh in thе rесоrdеd
ассоuntѕ. Likеwiѕе, if any оvеrhеаd inсurrеd by the small business
еntеrрriѕе thеn it iѕ recorded in the form of еxреnѕеѕ in ассоuntѕ еvеn in thе
саѕе when thе billѕ are сlеаrеd much lаtеr. Tурiсаllу, the ѕmаll buѕinеѕѕ
possessors thаt аrе еngаgеd in the mаnufасturing business use thе accrual
mеthоd оf buѕinеѕѕ accounting.
The accrual mеthоd оf buѕinеѕѕ ассоunting inсludеѕ ѕоmе imроrtаnt issues
аbоut thе Smаll Business Aссоunting, which includes tаx liability iѕѕuе
(рау rоll tax, inсоmе tаx), mаintаining thе ѕераrаtе buѕinеѕѕ transactions,
internal control аnd the quarterly returns. In аdditiоn, thе bank ассоunt
reconciliation аnd the еmрlоуее benefits роliсу are few other iѕѕuеѕ
inсludеd in ассruаl method of business ассоunting. Consideration of аll the
thingѕ iѕ vеrу еѕѕеntiаl fоr a ѕuссеѕѕful and a fаultlеѕѕ buѕinеѕѕ acсоunting.
WAYS TO REAP PROFITS IN
REAL
TIME
Whеn уоu ореn a small business firm, thеrе are lоtѕ of tаѕk tо tend to in оnе
time. Some оf the imроrtаnt асtivitiеѕ that nееdѕ immеdiаtе аttеntiоn during
bеginning mоnthѕ оf a firm inсludе registering buѕinеѕѕ firm, getting
license, fоrmulаting investment рlаnѕ аnd policies, filing раrtnеrѕhiр dеаlѕ,
рrоfit аnd loss ѕhееtѕ, аnd other buѕinеѕѕ deals. In the mаzе of аll thеѕе
асtivitiеѕ ассоunting gеtѕ bасkѕеаt.
Smаll business accounting is thе kеерing аnd mаintаining оf the financial
rесоrdѕ оf thе firm. This hеlрѕ in retrieving the finаnсiаl аnd ассоuntѕ
rеlаtеd information whenever nесеѕѕаrу. Thеrе are twо fundamental ways tо
achieve ѕmаll buѕinеѕѕ ассоunting which includes:
• Cash-Basis Aссоunting
• Aссruаl -Bаѕiѕ Aссоunting
Smаll buѕinеѕѕ firms аrе frее tо рut fоr either of thе method аѕ реr thе
соnvеniеnсе аnd rеѕоurсеѕ available. Also, IRS tеrmѕ аnd соnditiоnѕ must
be fоllоwеd bу whilе opting for аnу оnе оf thе ѕmаll business ассоunting
method.
Cаѕh-bаѕiѕ accounting is оnе оf thе оldеѕt mеthоdѕ uѕеd bу аlmоѕt еvеrу
small buѕinеѕѕ firm оwing tо its trаditiоnаl uѕаgе аnd аgе lоng truѕt on the
рrосеdurе. In this process, аѕ ѕооn аѕ thе income iѕ rесеivеd, tаxеѕ lеviеd
are dеduсtеd right аwау. And, in the ѕimilаr vеin, еxреnѕеѕ аrе dеduсtеd аѕ
ѕооn аѕ thеу аrе bеing раid. Thiѕ mеаnѕ thаt in саѕh-bаѕiѕ accounting
ѕуѕtеm еxреnѕеѕ аnd inсоmе is entered intо thе jоurnаlѕ аѕ thе trаnѕасtiоnѕ
tаkеѕ рlасе. Thiѕ iѕ the ѕimрlеѕt wау of ѕmаll business accounting,
еxеrсiѕеd bу firms wоrldwidе.
In Aссruаl-bаѕiѕ ассоunting, accounting transactions are rесоrdеd
immеdiаtеlу withоut even rеgiѕtеring whаt all expenses have been mаdе so
far. There are ѕераrаtе еntriеѕ for different transactions taking place in thе
buѕinеѕѕ firm. Thiѕ imрliеѕ thаt whеnеvеr ѕоmе sale tаkеѕ place, income
gаinеd with thе transaction is recorded еvеn when еxреnѕеѕ are уеt duе to
bе раid i.е. рауmеntѕ can bе mаdе аt lаtеr date of thе mоnth. Thiѕ
ассоunting рrосеdurе entails ѕmаll buѕinеѕѕ to keep track of accounts
сlеаrеd, рауmеntѕ duе, income rесеivеd, рrоfit mаdе, losses inсurrеd, billѕ
сlеаrеd, invеntоrу lists, аnd employees salary in ѕераrаtе fоldеrѕ аnd books.
However, оwing tо the соmрlеxitу оf the accrual bаѕiѕ accounting,
professional сhаrtеrеd ассоuntаntѕ аnd bооkkеерing еxреrtѕ аrе hirеd tо
hаndlе the entire ассоunting dераrtmеnt efficiently lеѕt business mау suffer
duе tо smallest оf thе nеgligеnсе.
There are small buѕinеѕѕеѕ ассоunting firmѕ in thе market availing great
services in reasonable рriсеѕ. But, уоu nеvеr knоw whiсh оnе iѕ mеrе
bluffing аbоut the quality services. For this уоu need to dо a grеаt dеаl оf
bасkgrоund rеѕеаrсh whеrе in уоu аrе rеԛuirеd tо study thе market, find оut
рrеviоuѕ customer's rеviеwѕ ѕо that уоu can tаkе a ѕоund dесiѕiоn bеfоrе
signing оn the dеаl.
Alѕо, уоu knоw, in ѕuсh a fast расеd buѕinеѕѕ wоrld, уоu just саnnоt
dереnd оn the traditional accounting mеаѕurеѕ аnd riѕk your рrоfitѕ entirely.
It bесоmеѕ mandatory to hirе professional assistance оf CPAs ѕо as to beat
thе соmреtitiоn in the mаrkеt. Thus, a small еffоrt on your раrt in searching
fоr аn efficient small business accounting firm will mаkе уоur buѕinеѕѕ run
оn smooth platform and rеар ѕuссеѕѕ.
Introduction
There is no doubt that an effective bookkeeping and accounting system is the
key to running a successful business. The art of bookkeeping and accounting
systems is to understand the financial aspects of your business. A business will
fail if it doesn’t maintain good records of its transactions. A business can do
well in all other aspects, but if it fails in its financial aspects, such a business
will crumble.
The success of a business is determined by several factors, of which
bookkeeping and accounting is a very important one. Success in business is
not determined by how many sales you made or the profit you generated but
by how you kept track of your transactions. The question is, how will you
realize the profits generated and the sales you made if you do not keep records
of your transactions?
It is only when you keep up-to-date financial records of your transactions that
you can determine the performance of your business. A business is operated to
generate profit, but this goal can be hindered if one fails to maintain an
effective bookkeeping and accounting system.
The art of bookkeeping is an essential aspect of a business. Some small
businesses failed - not because they did not make sales, or they failed to
produce good products - but they failed to maintain an effective bookkeeping
and accounting system.
We do not just emphasize the importance of bookkeeping and accounting
because we want to force business owners to do it. The importance of
bookkeeping and accounting is explained because it is vital for becoming a
successful business owner and is important for both small and large
businesses.
No matter how small your business is, you need to keep good track of all
transactions. When you operate a business, you will certainly carry out some
transactions, and these transactions should not be left unrecorded. This book
was written to explain how to appropriately track those transactions.
Businesses operate well when effective bookkeeping and accounting systems
are managed. To understand the art of bookkeeping, one needs to understand
some basic concepts. A business should be operated to achieve success, not
only to make a profit.
You must have heard of the word bookkeeping on one or two occasions. In the
business world, bookkeeping is not a new thing. It has existed for so long.
When we talk about bookkeeping, the first thing that comes to people's minds
is that bookkeeping is the art of keeping books.
Bookkeeping is different from that; it is a broad terminology in financial
accounting that entails the process of keeping good records of all financial
transactions in a business.
If you want to make wise decisions in your business, then you need to practice
effective bookkeeping. Bookkeeping helps you to make better decisions in
your business. As a business owner, you need to make good decisions that will
have a positive effect on your business. A bad decision can ruin your business
and leave you with no choice than to shut down your business.
Decision making is a vital aspect of a business. You cannot make good
decisions if you don’t know anything about bookkeeping. Bookkeeping
reveals areas where a business is lagging. With this information, you can set
new goals to fix the problems in these areas.
What Is Bookkeeping
Bookkeeping, in simple terms, can be defined as the simple act of keeping
stock of your business activities. When we talk about the basics associated
with bookkeeping, we can align it to a small business where you can quickly
write down all you have in the little shop as you record all the items that come
into the shop and what goes out of the shop.
The term bookkeeping is quite easy to understand and, as the name implies, is
simply comprised of a book where you keep a record of income and outgoings
for business purposes. It includes every one of the transactions of the business
carried out within an organization. However, so as to get a full understanding
of bookkeeping, let's take a look at it from the perspective of a small business
owner.
Take this scenario for example. Mrs. Adams is planning to open a small
supermarket for basic home necessities in the neighborhood. She has the store
filled with toiletries, soap, detergent and other much-needed home supplies
and materials. However, Mrs. Adams knows she has to keep a full record of
her stock and the prices they were purchased for (cost) before she finally opens
the supermarket to the public. This is her first step to ensuring bookkeeping taking inventory of the shop contents and her expenses. In her inventory, she
will also include the cost of renting the store as well as the overall cost of
opening the store.
Now, after she has done all of this, her shop is ready for people to start
patronizing it. Her next step will, however, be opening a new book to take into
account what is being bought from the store (sales). With this record, she will
be able to determine her income, loss and profit as well as deciphering whether
or not there are fast moving products/goods compared to others. With this, she
has fully used the potential of basic bookkeeping.
This small example has defined simply what bookkeeping is for a small
business within a neighborhood. However, as the business continues to grow,
the basics she indulges in start becoming even more complex and more
complicated bookkeeping ventures will be required, as we’ll discuss later.
However, before we continue to go into detail, it is important that you have a
good knowledge of some of the basic terminology used in a bookkeeping
account.
Tracking the money: This involves the bank recording cash and reconciling the
cash, which records the process of the cash flow from where the transaction
originates and where it ends.
Earning money: This involves income, which includes all money coming into
the organization.
Who wants my money: This is a record of your creditors, loan providers and
tax regulators. It involves money going out vs. money coming in.
Financial Statement: This is a statement of the account that shows all of the
transactions and calculations that comprise the activities of the business.
Income Statement: This statement shows all the earnings of the business in
total and is explained further later in the book. It is an integral part of the
financial statements.
Balance Sheet: Another integral part of the account sheets, which shows the
calculation of how the business is faring.
Some abbreviations for your basic knowledge of bookkeeping, which you will
come across in your study, include:
A/C- stands for Account
A/R – stands for Account Reactivated
A/P - Accounts Payable
B/S - Balance Sheet
PL - Profit and Loss
PAT- Profit after Tax
PBT- Profit before Tax
CP - a Cash Payment
EBT - Earnings before Tax
EAT - Earnings after Tax
These are a few abbreviations you have to be familiar with as you continue
learning about bookkeeping from the simple process to the complex process.
The Differences Beetween Accounting And Bookkeeping
To the untrained mind, you may not find much difference between a
bookkeeper and an accountant. Most people use both terms interchangeably as
if they mean the same thing.
So what is the difference between accounting and bookkeeping?
Both are very different and perform different duties and functions as they have
different training. To understand the difference between accounting and
bookkeeping, we have to look at each of them separately.
The principle of accounting is different from that of a bookkeeper and the way
to differentiate between them is through the tasks they handle. An accountant
places more focus on calculating and forecasting using figures. The
responsibility of the accountant includes calculating yearly profits, tax
deduction, salaries deductions and other financial projections. A person is
declared an accountant after the person has undergone professional training to
acquire the knowledge and understand of the principles of accounting.
On the other hand, a bookkeeper is trained to make records of daily financial
activities of an organization, such as recording invoices, receipts, payments
made including salaries and any daily financial transactions that occur in a
company. A bookkeeper does not make any calculation or projections for the
company, and does not require an understanding of the principles of
accounting to carry out their duties. For example, in a warehouse that deals
with the mass distribution of grain, the job of the bookkeeper includes taking
stock; taking a note of the number of bags in the warehouse. The bookkeeper
will also be responsible for keeping a record of the number of bags that leave
the warehouse, including the quantity of bags delivered to each client. The
bookkeeper also takes stock of other things in the company like equipment,
number of workers, working hours of the employees and so on.
The job of the bookkeeper ends at taking stock while, at this stage, the
accountants come in and use the data provided by the bookkeeper to compile
information about the company, which is more complex. The accountant
provides the financial statement with the data obtained by the bookkeeper. So
the process of bookkeeping will make no sense without the input of the
accountants.
We can now understand and differentiate between bookkeeping and
accounting and the principles involved in running the duties of both, as well as
the kind of qualifications, training, as well as study required for both
professionals. A bookkeeper can be trained in house, whereas an accountant
needs recognized qualifications.
You can see that bookkeeping seems less complicated than accounting; anyone
can quickly learn and apply the simple act of bookkeeping in managing their
business. Although both deal with financial data, accounting will require you
to go through a professional course, with in-depth knowledge of the principles
of accounting. In most cases, one person can handle both tasks, as most
companies use the term, bookkeeping and accountant interchangeably. It is,
however, imperative that a beginner knows the difference and what each does
in the process.
The Importance Of Bookkeeping
Bookkeeping is an accounting concept that refers to the act of recording,
verifying, retrieving, storing, and organizing the financial transactions carried
out in a business or organization. Bookkeeping is sometimes called record
keeping. Bookkeeping is an aspect of financial accounting that deals with
recording financial transactions and events in a business or organization.
Bookkeeping can be carried out manually or with the use of bookkeeping
software. The principles of financial accounting lie in keeping accurate and
up-to-date records. Therefore, bookkeeping is the basis of financial
accounting. It is the source of information for most of the accounting systems.
Bookkeepers are trained to use their analytical skills in recording financial
transactions because most accounting information is sourced from these
financial records. There are different aspects of financial accounting; these
include bookkeeping, auditing, share valuation, financial forecasting, etc.
Without bookkeeping, none of these aspects can function; bookkeeping is the
backbone of financial accounting.
Bookkeeping provides well-detailed and accurate information from which
other accounts like balance sheets, trading, profit and loss accounts, ledgers,
and depreciation, among others, are prepared. Without bookkeeping, none of
these accounts can be prepared. Bookkeeping is a vital aspect of financial
accounting.
Each financial transaction in a business must be recorded. There are ways in
which these transactions are recorded. Bookkeeping does not only involve the
recording of figures, but it also records financial transactions and events.
Bookkeeping is essential for a business to thrive.
The concepts of bookkeeping and accounting are often used interchangeably,
although they are separate. Bookkeeping is a vital aspect of accounting, while
accounting is the general way of managing a business's finances. A person
who studies bookkeeping is referred to as a bookkeeper.
A bookkeeper must understand some accounting principles and how
transactions should be recorded. The process of recording and organizing
transactions is called bookkeeping. Accounting is a broader concept and
should not be mistaken for bookkeeping. Bookkeeping is simply an aspect of
financial accounting.
Gone are the days when bookkeeping was done manually, the process of
recording and organizing financial transactions has been made easier in today's
world. Bookkeeping can be carried out via computer software. There are
several programs used for recording and organizing transactions.
Keeping accurate and up-to-date records of all transactions is vital in
bookkeeping. Bookkeeping is useless if the transactions recorded are not
accurate. The most important factor in bookkeeping is accuracy. Bookkeeping
is done to offer well-detailed and accurate information required to create
accounting statements.
Types Of Bookkeeping
Since we now have a basic understanding of what bookkeeping is, we are
going to take a dive at focusing on the different types of bookkeeping available
within this chapter.
In case you don't know, there are quite a lot of bookkeeping types, which are
differentiated, based on the kind of records they keep.
The Accrual Method of Bookkeeping
This type of accounting, which takes into account all the details of the
company, is called the Accrual method. You take into account in your records
the liabilities, assets and equity that can be analyzed into reporting the
revenue, net income and expenses of the company. This kind of record is kept
by bookkeeping and can be used on a monthly, quarterly and yearly basis to
analyze the file kept by the bookkeeper.
The accrual method of bookkeeping is what is used to capture all of the
activities of the company. The technique requires professional accountants in
using the data and information provided by the bookkeeper in the analysis of
the business. This type of bookkeeping is not particularly useful for small
businesses that can make do with a simple form of bookkeeping.
It requires complex input of the transactions on an account sheet and
calculations and interpretations in proving the information that will require
explanation.
Revenues and Receivables
This type of bookkeeping method is under the Accrual method where revenues
will be input in the particular way the money was earned, regardless of the
period when it was received.
To understand this better, we have to look at an example in which the company
provided a service that would cost 2,000 dollars on June 21st, after preparing a
sales invoice. The money will be recorded on the revenues and assets account,
which will increase by 2,000 dollars even though the money has not been paid
to the company yet.
Expenses
With the Accrual method, the costs will reflect on the income section while
accounting for the business. Expenses are one of the indices in a business that
must be recorded accurately; it involves the flow of cash or funds away from
the business. Every business must spend in its operations in the acquisition of
business materials to carry out business activities.
Every business should have an expense account where the expense of running
operations is recorded and information can be easily retrieved for deductions
and calculations. As we go further into this book, you will realize that there are
some calculations that we need in order to make up the total expenses for a set
period of time in order to derive an analysis of the business.
Regarding expenses, we can determine the health of the business and whether
or not it is wise to increase the expenses or decrease expenses depending on
the situation that will fit the market at the time. The expenses of the business
need to be monitored carefully to ensure that the business does not go in the
wrong direction. In a simple analysis, especially for small scale businesses,
always watch that the expenses are not more than what is coming into the
system to remain in business. It is only at the initial period of starting the
business that the expenses can be higher than income and that will be
acceptable.
By keeping a record of the expenses, you can quickly check if the figure is
higher than the amount that the company is making. Then you can analyze
what you are spending on money on and how much money and look for ways
to reduce expenses and increase profit.
For example, if you are the owner of an ice cream truck, you have your
expense list, which includes the raw materials for the ice cream, transportation,
maintenance of the vehicle, payment at the car wash, running costs of the
vehicle and so on. At the end of the quarter, you notice that your expenses are
a little higher than the amount you are gaining for the business.
What do you do at this instance?
The obvious answer is to check for ways to reduce expenses and/or increase
profit. You’ll always be on the lookout for ways to reduce expenses and
therefore increase profit. Remember we are trying to maximize profit.
From the apparent list of your expenses, you can try to reduce the costs by
cutting down on fuel consumption of the van. You can decide to spend time at
a particular location you know you have high patronage to maximize profit
and reduce expenditure. Pick locations with high patronage and spend time
there rather than driving around town, thus saving on fuel costs and wear and
tear.
Also, you can reduce the expenses on the car wash and do the washing
yourself. With eliminating expenses in those two areas, you can analyze how
helpful these changes would be to your next financial statement.
There is the recurrent expenditure of a business that occurs regularly and
recording such expenses will enable the company to make plans to
accommodate such costs on time. Some examples of these recurring
expenditures include salaries, transportation, utilities, working materials, and
so on. Since you know these are needed for the operation, then plans can be
made beforehand to make money available when due.
So keeping a record of your expenses is essential because these records will be
used in planning for the next financial period of the business. This is just like
preparing a budget to run the business, where these recurrent costs for the
operation will be known in advance and can be used to anticipate what needs
to be available in the future.
Recording expenses will help you to manage your spending when you become
cautious about what you spend money on, especially when you find out that
some of these expenses are not relevant to the growth of the business.
The importance of keeping an expense list can be summarized in the following
points:
•
For proper record keeping and tracking the expenses of the business.
•
In analyzing the market for profit and loss.
•
In the production and determination of financial report.
•
To keep track of recurrent expenditures and other forms of cost of
operation.
•
To keep track of the finances of the business.
Differentiating between the Accrual Method and the Cash Method
There are some noticeable differences between the Accrual method and cash
method, which are listed below:
•
Unlike the cash method, money owned for services rendered is recorded
as an asset.
•
In the Accrual method, the bookkeeper records immediately when a
service fee is agreed upon while with the cash method, it is only recorded
when cash exchanges hands. A good example is with a small business that
makes use of the cash method. The owner of the ice cream shop will make a
record when the customer has paid for the ice cream bought. In big
corporations, when the deal is put on paper, it is recorded while each party
makes a plan on how long it takes to finally complete payment and the length
of the contract or operation. But it is already recorded in the books as the deal
is struck.
•
With the Accrual method, bills, loan payments and any other expenses
are regarded as a liability, which is not the same as cash.
•
The Accrual method records net income using revenue earned and bills,
while the cash method uses just cash receipts and cash spent.
•
While the Accrual method provides in details the assets, liabilities and
equity, the cash method does not provide such detailed information.
From the point listed above, it is obvious that the Accrual method is most
preferred since it aligns with preferred accounting principles, unlike the cash
method.
Single and Double Entry Bookkeeping System
The single entry bookkeeping and the double-entry bookkeeping are the two
major kinds of bookkeeping commonly used in the world today. We are going
to discuss in detail the two significant types of bookkeeping including the
differences, advantages and the disadvantages of the systems.
Single Entry Bookkeeping System
The history of single entry bookkeeping is sketchy because it has been around
for a very long time and scientists can trace its origin as far back as 200 BC.
Traders in history had adopted this method of accounting because of its ease in
keeping records of simple sales.
The single entry bookkeeping system is suited for small scale businesses that
want to keep things simple by recording everything with just a single account.
Records and reports of cash spent, receipts of cash, purchase made and sales
are reported in this single account system.
In this type of bookkeeping system, just one account will be affected as the
bookkeeper records all daily, monthly and yearly cash transactions. This kind
of system proves difficult for an accountant to analyze the records of such
accounts because it is only a single accounting of all transactions made.
The single entry system is not as complex as the double entry system and does
not require the expertise of an accountant. Anyone with little or no experience
in accounting whatsoever can operate the single entry system where you are
only required to fill out all the transactions in a single manner.
The single entry method is most suitable for small businesses, where only
completed transactions are recorded. What we mean by this is that only
effected transactions are recorded. For example, a cash transaction will be
recorded in the cash account when the money and goods or products have
exchanged hands and the business is complete. Assets and liabilities are not
taken into account with the single entry method, unlike we do in double entry
accounting.
In the case of the business getting a loan, the single entry bookkeeping will
record it as cash coming in. However, it becomes difficult to register the
interest from the loan. So much information cannot be acquired from single
entry bookkeeping. It is a difficult task when an accountant decides to transfer
data in a single entry book to a double entry book.
Advantages of Single Entry Bookkeeping
Although single entry bookkeeping does not give out more detailed
information than the double-entry bookkeeping, it has its positive side.
Here is a list of some of the advantages of using single entry bookkeeping:
•
It is easy to operate and anyone without knowledge of accounting can
operate it. This makes it suitable for businesses that cannot afford the services
of professional accountants.
•
It is easy to understand and interpret by anyone looking at the business
books.
•
There is no need for complicated accounting software to operate the
single entry bookkeeping method. All transactions can be done manually by
inputting figures in the correct column.
Disadvantages of Single Entry Bookkeeping
The single entry bookkeeping may be simple, but it has so many disadvantages
when being compared with the double entry system. The disadvantages are
listed below:
•
You cannot use this method of accounting for public companies that
have to publish a statement of account. The information will be inadequate and
one cannot access all the financial transactions of the company.
•
You do not have records of assets and liabilities of the company, which
make the book inadequate for proper accounting.
•
With a single entry system, it is difficult to check for errors, unlike the
double entry system, which has various tools you can use to check for errors.
•
The single entry system does not support accrual accounting, which
makes it impossible to analyze other transactions, such as supplies, payment of
debts and so on.
•
One cannot obtain an audited financial report from this kind of
accounting.
•
You cannot use it to seek a loan or other financial support.
•
It is easy to carry out fraud with the single entry system as one can
easily alter figures to tally with the total.
The choice of which of the methods of bookkeeping to use lies solely on the
business owners as they have their specific advantages and disadvantages.
Double Entry Bookkeeping System
This kind of system is used both by accountants and bookkeepers with
complete and well-organized details of transactions in the company. The
double entry bookkeeping method is used by big companies and organizations
to record their complex transactions.
You can use this account to attract investors or apply for a loan as it gives a
potential lender a clue as to the performance of the company. It is easier for an
accountant to make use of this system to analyze the prospects of the company.
Before advancing further, one must admit that without bookkeeping, there will
be no accounting. Bookkeeping is the first step to accounting, which involves
the recording of all information gathered to give a bigger picture of the
company.
Now, let’s shed light on the complete details of the double entry bookkeeping
system so that you have a better understanding.
The double entry bookkeeping system uses an accounting principle in its
operations, taking into account the liabilities of the company with the capital
as assets of the company. This system is based on the two fold principles,
which makes us understand that as long as there is something taken which is
regarded as debt, we are getting something back, which is regarded as credit.
In business, it is expected that when you obtain capital, you intend to use that
capital to gain some resources for the set period - one of the principles of
double entry bookkeeping.
An accountant must be able to identify which one of the elements is affected in
any business transaction and to record these transactions appropriately.
The double entry method is not perfect in all areas as one may prefer to use the
single entry method in some instances. There is never a perfect system and
thus we have systems that have been modified from time to time to meet up
with our demand for a system that will meet our individual requirements.
Advantages of Double Entry Systems
•
There is a deep understanding of the financial transactions of the
company that is represented effectively.
•
With this system, you can keep a record of all transactions that exist in
the company for it to make room for all elements.
•
There are more accurate records using this method.
•
You can easily analyze different periods within a transaction with this
method when you want to compare and analyze different periods of time.
•
The profit and loss of the company can be determined fast and easily
using this system.
•
You can get every transaction detailed easily with this kind of method.
Disadvantages of Double Entry Method
•
The double entry method is not easy to assimilate, especially as a
beginner. It is very complex to use; it takes time to understand and get used to
working with.
•
It is expensive to use this method in organizations.
•
It is time-consuming in detailing all financial transactions in the
organization.
Bookkeeping Excel vs. Bookkeeping Software
You can use bookkeeping Excel sheets for manual output, which is easier with
single entry bookkeeping. There is software available that can be used to make
accounting more comfortable and faster, especially when using the double
entry bookkeeping.
The manual form of bookkeeping has been used for a very long time and you
can make use of the Excel sheets to input your data when you use manual
bookkeeping. The manual form of entering in bookkeeping can be tedious
when operating within a big organization, so it is best suited for small
business.
Excel sheets are available on all computers and in most cases come preinstalled, not forgetting that they are also simple to use. The Excel sheets come
with prearranged sheets that you can easily input data. The sheets makes it
easy to work with, such as recording data and numbers in bookkeeping. You
can easily make calculations, draw tables and charts, such as bar charts and pie
charts on the Excel sheets.
This makes it easy to present data in ways that can easily be analyzed.
Accountants use Excel sheets to make calculations, especially with preinstalled formulas for calculating statistical parameters. You can quickly learn
Excel and start using it for your business in simple deductions, making it easy
to view a pictorial presentation that will help simplify data so you can easily
visualize and understand it.
The installation of Excel sheets comes free with Microsoft Office, containing
all that you need to prepare financial reports and other accounting reports. You
can also use the Excel sheets for both single entry and double entry
bookkeeping in the production of salary structure.
In preparing the salaries for the company, the Excel sheets help by putting the
names and figures in good order. Also, you can get accurate calculations in this
situation. You can use the Excel sheet in your bookkeeping without using any
other software.
Bookkeeping software is becoming popular for both small scale businesses
and large enterprises. Software makes it easy to carry out accounting duties
with such accuracy and few to minimal errors.
With the software, you can work out complex calculations, analysis and other
accounting functions, even if it is being operated by someone with no
experience in accounting. One such useful software is called SAGE, which is
easy to use and to obtain data for financial transactions. The SAGE software is
an interactive program, user-friendly and easy to use as you input your data to
get various accounting reports.
This software is used in the preparation of financial statements, especially with
big corporations. Such a task cannot be performed on the Excel sheets because
they need more complex calculations and deductions. The software can be
adjusted to the needs of the business for easy input of data, as well as
computation.
A small business might not need to waste money on such software, as the
Excel sheets can do the work adequately. However, big corporations with huge
accounting details will require a more complex kind of bookkeeping and
accounting software.
Function Of An Accounting Officer
It takes some of us longer to acknowledge we need help than it does others.
I interviewed my first accountant about two years after I started selling online.
I was making about $1,500 a month selling on eBay at that time and I was
starting to get it all together. I had a business checking account, a business
credit card, and had just upgraded all of my computer equipment.
Things were looking good, and I decided having an accountant on my side
could be the ace-in-the-hole I needed to be more successful.
Ok. I made my appointment. Gathered up all my receipts and printed out my
reports from QuickBooks. In effect, I was ready to do battle.
I walked in, placed my bundles on the desk, and sat down opposite the
accountant. I was promised a free hour’s consultation, and I made sure to get
in as many questions as I could. I suppose I wanted to get my money’s worth –
even if it was a free appointment.
When I walked out of that office I was psyched up and sure he was the guy.
And, yet – I didn’t add an accountant to my team for another five years. Why?
Because I couldn’t justify the $65.00 an hour fee several times a year.
It doesn’t make any sense now. But sixty-five bucks is sixty-five bucks, and
thirteen years ago, that was a lot of money.
Let me tell you what I’ve learned over the last ten years that justifies every
penny I pay my accountant.
Perhaps the biggest reason is peace-of-mind. I’m a seat-of-the-pants type of
guy, which means I normally just jump into things and do them the best I can.
While that sometimes works selling on eBay or writing books, it doesn’t
always work the best when you’re trying to manage your finances.
I still do my day-to-day accounting and my taxes myself, but I’m smart
enough now to have someone peek over my shoulder now and then to make
sure I’m on the right track. Sometimes I make stupid mistakes, overlook
important details, or just can’t see obvious mistakes. An extra set of eyes on
my paperwork can point out these hidden boners (sorry for that word, but it is
appropriate here).
Fortunately most of my mistakes have been small ones that are easily fixable.
But, the peace-of-mind thing is still an important factor that keeps me paying
my accountant’s bill.
It’s an extra eye on my paperwork pointing out that I spent too much on
inventory last quarter, or I probably don’t need to buy a new laptop every year,
or have the fanciest iPhone each time they come out. Sometimes you don’t see
(or don’t want to see) your own crazy spending habits.
Let’s talk about you for a minute.
What can working with an accountant do for your business? Obviously, there’s
that peace-of-mind thing. They can also –
1) Help you determine how much you should pay for your quarterly tax
payments.
2) Find extra deductions and credits to reduce your taxes and help you receive
larger refunds.
3) Help you understand the breakeven point for your business so that you
know how many sales you need to make just to cover your bills.
4) By challenging your spending habits, they can help you increase profits and
make better purchasing decisions.
5) If your business is seasonal, depending more upon Christmas or
summertime sales, an accountant can help you smooth out cash flow
fluctuations so you can keep your business running smoothly year around.
6) Set up a retirement plan that allows you to maximize current earnings while
saving more money for retirement.
7) A good accountant can help you plan for growth, or to reach other stretch
goals you may have for your business.
With all of that said, how do you find a good accountant that you can work
with?
Most accountants offer a free consultation. This is a chance for you to meet
with them and kick the tires a little. Normally the accountant will tell you a
little bit about how they like to do business and what they can do for you, and
then they will throw the ball into your court and let you ask some questions.
My suggestion is to make up a list of questions before your appointment.
Ask questions about costs. Ask about how often you need to consult with
them? Ask what the accountant expects from you? What papers do they need
you to supply? If you’re looking for help incorporating your business or
setting up a retirement plan, nail down the costs. If you’re looking for tips to
help grow your business, make sure they have experience dealing with
businesses similar to your own. Get references, and be sure to check them out.
Most importantly, don’t rush into any arrangement. Interview at least two or
three accountants until you find someone you feel comfortable working with.
One final note: Depending upon the accountant you chose to work with you
may be asked to provide an “accountant’s copy” of your records each time you
come in. This makes it easier for your accountant to keep tabs on your
business, and check for errors in your record keeping.
If your accountant requires an “accountant’s copy” to work with you’re going
to need to switch to QuickBooks. GoDaddy Bookkeeping does not offer this
feature.
What Is An Asset
It’s easy enough to understand that assets are things that have value that your
company owns. But you can’t just total up everything you own, then place the
amount in one huge asset account. Even your company’s cash reserves will
have to separate into different accounts – main checking account (cash) and
petty cash, with retained earnings placed in a revenue account. The reason for
this specificity is to allow for more control over your company’s finances. For
example, you will pay all your monthly bills and routine expenses out of your
cash account, but you should also fund a petty cash account, so employees
have access to funds for unexpected per diem accounts and unplanned
purchases. The following is a list of some of the types of accounts commonly
listed under Assets:
●
Cash: There may be serval cash accounts or only one, depending on the
structure of your company. If you have more than one account into which you
make deposits or withdraw money for purchase, each of them should be
identified:
○ Petty cash
○ Business Checking
○ Business Savings
●
Accounts receivable. Total amount of all unpaid invoices sent to
customers for goods and services sold. This account is separate from cash
because you have not received the money yet.
● Inventory. The total value of all items your company currently possesses,
and that you intend to sell.
●
Equipment. The total value of all business equipment that you have
purchased and own outright.
● Buildings. The total value of any buildings your company owns.
● Land. The total value of all undeveloped land your company owns.
●
Investments. The total value of all securities investments your company
owns.
●
Prepaid expenses. If your company prepays expenses such as rent or
insurance, you may create an account to keep track of the value:
○ Prepaid rent
○ Prepaid insurance
●
Supplies. This may be included as part of the equipment account, or you
may create a separate account, depending on the nature and complexity of your
business.
What Is A Current Assets
Current assets are going to be any that the company owns that have a lifespan
that is a year or less. This means that the asset has to be easily changed over to
cash if the company needs to. Such assets will include inventory, accounts
receivable, and cash or cash equivalents.
Cash, which is the most fundamental and most commonly thought about the
current asset, can also include checks and bank accounts that are not restricted.
Cash equivalents are going to be assets that are very safe, but which can also
be turned into cash quickly if the company needs. The U.S. Treasury is a good
example of this. And then there are the accounts receivables, which are going
to show the reader any of the obligations that customers and others owe to the
company over the short-term. These sometimes happen if a company allows
the customer to use credit to purchase the product or service.
Inventory is an important current asset as well. Inventory can include things
like the raw materials to make a product, the products that are still in the
process of being created, and the finished goods. Each company is going to be
different, and the exact way that the inventory account looks is going to be
different. For a manufacturing firm, there may be a lot of raw materials, but a
retained firm wouldn’t have any raw materials.
What Is A Non-Current Assets Liabilities
Long-Term Assets
Besides just the current assets there are some long-term assets. These assets
are usually assets that you hold for periods that are more than one year. These
also represent the future growth of the business.
Some of these long-term assets can include but are not limited to:
Land
Vehicles
Computers
Machinery
Equipment
Securities
Stocks
Bonds
Businesses use these long-term assets to produce revenue. The longer the
asset the better. It will cut costs and make the business produce more income.
This will also make your business more valuable. In return it will increase
stock prices. However, you do need to be careful. It is possible to have too
many long-term assets. If you have too many then the company or business
may not have enough capital and could have trouble keeping up with expenses
and liabilities. However, on another note, having too few long-term assets
could also harm the company. This could make it vulnerable to changes and
difficult to fight against the competitors.
Fixed Assets
With fixed assets the main purpose is to create revenue. These types of assets
are not to be sold. Even though fixed assets cannot be turned into cash they do
enhance the value of your company.
Due to the GAAP a fixed asset must be recorded on a balance sheet at a cost
value and not market value. This is considered a historical cost principle.
There are several reasons why they are treated as a historical cost principle.
Cost can be easily verified in an audit. This is done by checking a receipt.
Whereas, market value is highly subjective.
When a company starts it is assumed that they are not going to be selling off
assets and shutting down. As long as the business intends to stay in business
the market value of a fixed asset is irrelevant. This is because the function of
the asset is to produce revenue and not to be sold.
According to the GAAP it is required for a company to recognize revenue and
expenses in a financial period when they are earned or incurred.
The initial cost of an asset was recorded on the balance sheet when it was
purchased. Therefore, the amount of depreciation must be listed as an expense
over the span of life used for that asset.
Land is one of the most common and expensive fixed assets. It will include
everything on ground (for example grass, fences, and trees), over the ground
(for example air, space), and under the ground (such as minerals). It is
supposed to have the longest lifespan or even indefinite. This is because the
only thing that may shorten the lifespan of land is a natural disaster. This is a
valuable asset as it usually is not used up, destroyed, or stolen. On the balance
sheet it will reflect the cost of the land. With that it will also include incidental
cost such as surveys, insurance, legal fees, and property taxes.
Buildings, much like land, are expensive and a valuable fixed asset. They
indirectly produce revenue. The cost of acquiring buildings usually includes
insurance, closing costs, taxes, and the purchase price. They do not last
forever. Therefore, they have a finite lifespan.
For all business your equipment is essential. Much like buildings they
indirectly produce revenue. The cost of equipment generally includes the
purchase price, sales tax, and delivery fees.
While looking at the long-term assets you need to remember that any asset that
is purchased and lasts more than one year is a capital expenditure. These
expenditures are recorded on the balance sheet. Usually they include large
purchases that bring a lot of value to your company or business. These will
not be listed in expenses because they will not be used up in the current
accounting period.
So we talked about the bigger assets but what about the smaller ones such as a
coffee maker, trashcan, or a light bulb? These are considered revenue
expenditures. These will last several accounting periods. Even though $500 is
a common limit for the maximum cost of this type of expenditure it can vary
based on the company or business. These assets are not recorded in the
balance sheet. They are usually listed as an expense to make it easy to record
them.
Depreciation
With long-term assets you will have many assets that will depreciate over
time. Land is the one thing that is the exception to depreciation. Mainly
because land does not depreciate. Depreciation is for those assets that are
good for only a given number of years and will eventually need to be
replaced. Therefore, we need to figure out how much it will depreciate over
time.
Depreciation will assign a cost of a long-term asset to an expense account in
the periods when the asset generates revenue. So when you think about it,
depreciation basically offsets the revenue of an accounting period with the
costs of the product or service consumed to generate the revenue.
The depreciation expense does not come to decrease value. Instead it is a
result from allocating cost of a period of time. Once you start using the asset
that is to be depreciated it is generally done quarterly or annually. The
depreciation ends when the company or businesses disposes of the asset or
determines that its lifespan is over.
There are several ways to record depreciation. The GAAP rule only requires
the method used is rational and systematic through the asset’s lifespan. Let’s
look at some of the ways to figure and record depreciation.
Straight-line method—this is the most common for financial reporting. It will
maximize net income more than any other method. It is also the easiest to
understand and follow the calculations. This method attributes an equal
amount of expense to each period of lifespan for the assets. Before we can
understand the calculations we first need to find out what salvage value is.
When a business uses the lifespan of the asset and is ready to sale it you need
to ask yourself how much you expect to earn from selling the asset. This is the
salvage value. So let’s look at the equation for the straight-line method:
Depreciation = (Cost – Salvage Value) / Lifespan
To explain this better let’s look at each aspect of the equation. First you will
take the cost of the asset and subtract the salvage value. The cost will be the
original cost when you purchased the asset. Then you will take this total and
divide it by the lifespan. The lifespan is the number of years that the business
sees the asset as useful. This gives you the depreciation cost.
For example, you have a flow jet for your business. The estimated lifespan is
five years. You originally purchased it for $20,000 and the estimated salvage
value would be $5,000. Let’s put this in the equation. $20,000 - $5,000 =
$15,000 / 5 = $3,000. Therefore, the depreciation will be $3,000. Many
times, you can think of the lifespan as a percentage. The rate is 1. So the
lifespan for the flow jet will be 1/5 or 20%.
With a depreciation schedule we see the book value. It is important to know
the book value of an asset. To find this you will take the original asset cost
and minus the accumulated depreciation.
Book Value = Cost – Accumulated Depreciation
Market value and book value are not the same. Book value represents the
value of the asset according to the business books. Each year the book value
has to be updated. This is because the accumulated depreciation will change
each year and the company or business needs to know when the lifespan will
be up. However, the book value should never go below the salvage value of
the asset. This is a conservation principle. Keep in mind that when the
depreciation is finished you will see the salvage value and the book value will
be equal.
Declining-balance method—with this method the depreciation assigned for
each year of usage is different. Suppose that you feel that your asset is more
productive and creates more revenue early in its life. This method is an
accelerated method. You will see more depreciation expense allocated early in
the asset’s life than it would be in the later years. For the declining-balance
method we can calculate the depreciation expense with the following formula:
Depreciation Expense = Rate * Current Book Value
Since the book value decreases each period so does the depreciation expense.
This is why it is called declining-balance method.
With all the methods you need to keep in mind that the book value will never
go below its salvage value and it will be equal when it is at the end of its
lifespan.
Sum of the Years’ Digits (SOYD) method—is another accelerated method for
depreciation. With this method the amount of depreciation is assigned to each
year of life based on an inverted scale of the sum of the years of its lifespan.
Units of Production method—is different than the other methods. It is based
on depreciation from a measurement of the asset’s output instead of its
lifespan. With this method it allows for more depreciation when the asset is
used more. The method is more used for assets such as vehicles and
machinery. For calculating this method you would use the following formula.
It is similar to the formula for the straight-line method.
Depreciation Rate per Unit = (Cost – Salvage Value) / Estimated Units of
Output
Keep in mind that natural resources are depreciated differently than other
assets. This is because once their lifespan is up or they are used up then they
can only be replaced through natural processes. To figure this you will need to
first find the cost per unit.
Cost Per Unit = Depletable Cost / Estimated Total Number of Units
Once you have the cost per unit then you can calculate the depletion expense.
Depletion Expense = Cost Per Unit * Yearly Number of Units Extracted
Modified Accelerated Cost of Recovery System (MACRS) method—must be
used for a business’s income tax returns. Businesses are allowed to use one
method for their income tax returns and another method for their financial
statements. With this method the Internal Revenue Service (IRS) will specify
depreciation rates and time periods for particular categories of fixed assets, for
example, furniture and computer equipment. Using this method will lower net
income which will lower the taxes owed to the IRS.
Current Liabilities
Liabilities are different from expenses. Think of expenses as the monthly or
daily costs associated with running your business. Liabilities represent a fixed
amount of money that you owe to outside third parties. Generally, you assume
liabilities as part of the overall investment for starting and/or growing your
business. The following are some examples of the type of Liability accounts
many businesses will record in their ledgers:
● Accounts payable. All outstanding financial obligations that the company
has not yet paid.
●
Sales tax payable. Especially if you sell goods and services online, your
company may be required to keep track of the sales tax you owe and pay the
IRS annually or quarterly. This account will help you record these transactions.
●
Salaries payable. Prior to distributing payroll checks to your employees,
the hours they work will accumulate total amounts payable in this account.
●
Retirement contributions payable. If your company provides employees
with retirement accounts with matching contributions, you can record
transactions here.
●
Mortgage payable. If you have bought a building for your business and
you still owe money on the mortgage, you should record all associated
transactions here.
●
Taxes payable. Your business may be responsible for a variety of tax
obligations, and separate accounts can be set up for each of them:
○ Federal unemployment tax payable.
○ Federal income tax payable.
○ State unemployment tax payable.
○ State income tax payable.
○ Social security tax payable.
● Interest payable. If you have taken out any business loans, you can record
amortized interest payable here.
Non Current Liabilities
Any time a company has obligations that carry a set value you have a known
liability. The known liabilities may fall into other categories such as:
Accounts payable
Sales tax payable
Unearned revenue
Short-term notes payable
Payroll liabilities
Accrued liabilities
If you remember, any goods or services purchased on credit are considered
accounts payable. However, when you make a sale it may incur yet another
type of known liability. This would be sales tax payable. This account will be
used for tracking and recording sales tax that needs to be paid to the state and
local governments.
Also remember when a company receives money in advance it would be
considered as unearned revenue. These unearned incomes can be considered
as a known liability.
Another form of known liability is a short-term note payable. This is a debt
that will be paid on a promissory note within one year.
An important known liability for a business is the payroll liability. The best
way to think about these liabilities is the amount paid to employees and is a set
amount paid on a predetermined date. This type of liability has three
categories.
Employee compensation
Payroll withholdings
Payroll taxes
For this we can look at your regular paycheck. You perform 40 hours a week
for two weeks at $9 per hour. This earns you $720. This would be considered
your employee compensation. From that $750 there are withholdings that are
deducted to fulfill tax requirements. These payroll withholdings are social
security, Medicare, and federal and state income taxes. However, social
security and Medicare taxes support benefits such as retirees, disabled
individuals, and other types of medical programs. Instead of employees
needing to pay their federal and state taxes directly to the government, your
business is required to deduct this and report it for the employee. The last one
is the payroll taxes. There are the withholdings from the employees that need
to be paid to the government. For an idea of how this is paid see the example:
DATE
ACCOUNT
DEBIT
CREDIT
July 31 Salary wage expense
$1,330
Social
security
tax
$200
payable
Medicare tax payable
$30
Federal
income
tax
$1,100
payable
There are times where an employee may request to have additional
withholdings deducted from their wages. The most common are:
Insurance premium payments
Pension or retirement plan
Balance Sheets
A balance sheet is going to show the assets of the company, the liabilities of
the company, and the net worth, or the owner’s equity. The balance sheet will
work along with the other financial documents that we have talked about in
order to show a complete picture of the financial state of that company. If you
hold onto stocks of that company, it is a good idea to understand more about
the balance sheet, such as how it is structured, the best ways to look over and
understand the sheet, and even tips for reading through the balance sheet.
How Can I Use This Financial Document?
The balance sheet is going to be split up into two parts. These two parts are
going to be based on an equation, and they must either end up equaling each
other or coming out so that they are balanced, or something is wrong with your
numbers. The formula that is needed to work with the balance sheet will
include:
Assets = Liabilities + Shareholder’s Equity
What all this means is that all the assets, or the money used to operate the
company, need to be balanced out by the financial obligations of the company,
along with any of the equity investment that comes back to that company, and
then they will be known as that company’s retained earnings.
The assets are important because they are what the company will use in order
to operate the business. The equity and the liabilities are going to be what will
support those assets. The owner’s equity, which can be known as the
shareholder’s equity, if the company is publicly traded, will include any of the
money that the shareholders invested in that company. It can also include any
retained earnings as well. This is important because it is going to represent the
funding sources for that particular business.
One way that the balance sheet is different than the income statement we
talked about before is that the balance sheet we talked about earlier is more of
a snapshot that showcases the financial position of that company right then and
there. If the accountant does this financial document on May 21, 2018, then
the balance sheet will show where the company is on that date. It won’t cover
February 21 to May 21. It just shows May 21.
The Balance Sheet For The Securities And Exchange Commission
Just like the bank wants you to put together a balance sheet to take a look at
whether they think you can do well with any credit they offer, the government
is going to require that any company that is traded publicly will put together a
balance sheet, usually each quarter, to show to their shareholders.
This balance sheet can be important because it will allow all potential and
current investors to see a good snapshot of the finances of that company. In
addition to some other things, the balance sheet is going to show you all the
value of the stuff that the company owns, right down to the office supplies that
the employees use, the amount of debt that the company is taking care of right
now, and how much inventory is in the warehouse. It can even tell the
investors about how much money the business will have available to work
with through the short-term.
This balance statement is going to be one of the first financial statements that
you should analyze when you want to see the value of the company. Before
you can learn how to analyze this balance sheet, it is important to know how it
is structured.
Before we get into this too much though, you need to understand that the
limited partnership, limited liability Company, and the corporation balance
sheets are going to be a lot different from the regular household balance sheet.
This is mainly because these companies have a lot of complex items in their
accounting records to keep the company going. This is why many of these
companies rely on an accountant to help them get it done.
Businesses are often faced with many difficult questions that others may not
know the answers to, such as how to depreciate out the costs for some of their
business expenses, how to record the lease obligations, how to account for the
expenses of construction at the power plan, and so much more.
No matter how overwhelming it can seem in the beginning to figure out all the
different parts of the balance sheet, it is actually pretty simple once you have
looked at a few. The best way to get through the balance sheet is to remember
that the purpose of this financial statement is to answer three basic questions
for anyone who is looking at that sheet. These three main questions that the
balance sheet should answer include:
What does the company have? These will be the assets of the company.
What does the company owe on? These will be the liabilities of the company.
What is left over for the owners of that business if they were to pay off all their
debts? This one is going to be the shareholder equity or the book value.
These are pretty advanced terms and fancy words, but they are there to help
give the investor a good idea of where the business is at that time. If you can
remember the objective of the balance sheet, all those fancy words and
accounting complexities won’t seem as overwhelming when you take a look
over it later.
One thing to remember is that unlike some of the other financial statements,
the balance sheet is not going to cover a range of dates. The information that is
present in the balance sheet is going to be good as of the date that is on the
balance sheet, but it won’t be able to tell you any date ranges in the process. If
you are looking to deal with this issue when calculating many of the
accounting ratios, then the best way to do this is to work with the averagely
weighted figures of the balance sheet.
An example of this is if you would like to figure out what the average value of
inventory was for that year for the company. You would be able to do this by
taking the value of the inventory at the previous yearend, add it to the
inventory’s value at the end of this year, and then divide them by two.
This is a quick trick that will help you to avoid any distortions by ending
period figures that may or may not be able to accurately reflect what occurred
throughout that year. For example, if the manufacturing business was able to
pay off all the debt it had in the year and this showed that there was $0 in
liabilities on this balance sheet, but then there was a line there to show the
interest expense on your income statement, this could be confusing.
By taking the time to weigh the average debt outstanding from the balance
sheet over that same period, you may be able to get a better idea of what the
business has going on here and why they listed some interest costs on the
income statement but not on the balance sheet.
Capitals
Final accounts are prepared at the end of the year and they consist of the
income statement, balance sheet, cash flow statement, and the statement of
retained earnings. All the accounts, which appear in the trial balance, are taken
to either the income statement or the balance sheet. In order to decide which
item goes where, the following principle of accounting is applied. All revenue
expenditures along with receipts are taken to the income statement while all
capital expenditure and capital receipts are entered in the balance sheet. It is,
therefore, essential to realize the importance of distinction between capital and
revenue items because any error in these items can lead to falsification of final
accounts.
A capital expenditure is one that increases the value at which a fixed or a
capital asset may properly be carried on in the books. All expenditure that
results in the acquisition of any permanent assets that are intended to be
continually used in the business purpose of earning revenue I’d deem to be
capital expenditure. The term capital expenditure is usually used for signifying
an expenditure, which increases the quantity of fixed assets, quality of fixed
assets, or results in the replacement of fixed assets.
An amount that is spent by the business for earning or providing revenue is
referred to as revenue expenditure. Revenue expenditure is one that constitutes
a proper deduction from income revenue. It is an expense. In other words, all
establishments and other expenses incurred in the conduct and administration
of the business are deemed to be revenue expenditures. All expenses incurred
by the way of repairs, replacement of existing assets, which not only add to
their earning capacity but simply serve to maintain the original equipment in
an efficient working condition are charged as revenue expenditures. Examples
of revenue expenses include any expenditure incurred during the normal
course of business. For instance, expenses of Administration, expenses
incurred in manufacturing and selling products, expenses related to salaries,
rent and repair of facets and so on. All those expenses which are incurred for
maintaining the business like the replacement of any existing permanent
assets, costs of stores consumed for manufacturing and so on are also deemed
to be revenue expenditures.
Deferred revenue expenditure is the term that's used for describing any
expenditure of a revenue nature with its benefits spread over a couple of years.
Some common examples of deferred revenue income include preliminary
expenses, brokerage payable on issue of shares, expenses incurred in shifting a
business, or even any exceptional repairs. All these might look like expenses
but when it comes to accounting, they aren't treated as regular expenses. Given
the massive amounts involved, these expenses cannot be written off in a single
financial year. If such expenses are written off from a single year's profits, then
there might be no profits left. To prevent this and to maintain a profitable
venture, deferred revenue expenses are written off from the income statement
on a yearly basis. The unwritten portion of the deferred revenue expenditure
will be reflected on the assets side of the balance sheet.
All capital receipts are reflected in the balance sheet and the revenue receipts
in the income statements. Capital receipts include the proceeds from the sale of
fixed assets, issue of any shares or debentures, and money received in the form
of loans. Any funds obtained in the due course of business are known as
revenue receipts. Revenue receipts include any proceeds from the sale of
goods, interest received on deposits, or even dividend on any investments.
Debits And Credits
If you’re like most people, you probably think of the words “debit” and
“credit” in terms of the kind of card you use to pay for items when you go
shopping. When you use your debit card, the money comes directly out of
your checking account; but when you use your credit card, instead of money
being deducted from your bank account, the amount of the purchase is added
to the total bill you will pay your credit card company at the end of the month.
This is a very basic understanding of debits and credits can help you navigate
the terminology of this part of recording financial transactions for your
business. However, in the world of bookkeeping, this essential concept is
somewhat more complex.
First, before we explore the specifics of how debits and credits are used to
record transactions in bookkeeping, let’s consider the basic equation upon
which all accounting is based:
Assets = Liabilities + Equity
Whenever you see a mathematical equation, you know that the two elements
on either side of the equals sign must have the same numeric value, so the
following two equations are correct:
2+1+1=4
3+1=4
But this equation is incorrect:
2+3=4
Because the value of a business is calculated using the accounting equation,
Assets = Liabilities + Equity, the numeric values of these terms must be a
balanced equation. If they are not, then your business’s books are out of
balance, and in order to create accurate financial statements, you will have to
locate where you have made bookkeeping errors.
Next, before we examine debits and credits in detail, we should take a moment
to understand the terms in the accounting equation.
●
Assets are any resources that your company owns that represent a future
value and can be expressed in monetary value. Cash is one type of asset, but
there are many others. For example, investments, inventory, real estate, office
supplies, equipment, and accounts receivable, all represent resources that you
own and that can be assigned a monetary value. In addition, so-called
“intangible assets” include your company’s reputation, your client base, the
perceived value of your brand, etc.
●
Liabilities are the amount of outstanding financial obligations owed by
your company. So, your company’s liabilities may include the remaining
balance on any mortgages, equipment leases, or business loans; accounts
payable; or amounts received for future sales that have not yet been delivered.
● Equity is the amount of financial interest all of a company’s shareholders
have in the company. For example, if you buy 1,000 shares of stock in a new
startup company at $2.25 per share, you can personally claim $2,250.00 of that
company’s value as yours.
So, the accounting equation, Assets = Liabilities + Equity, means that in order
for your company’s books to be considered balanced and in order, you must be
able to show that the total value of all of your assets is exactly equal to the
total value of all your liabilities plus the total value of all of the equity all
shareholders may have in your company.
This seems like a daunting task, and that’s why accounting uses both debits
and credits to record transactions.
Importance Of Debit And Credit Accounting
We began this chapter by considering a common understanding of debits and
credits – using your debit card takes money out of your checking account;
using a credit card adds money to your credit card bill. This is a great start to
understanding the importance of using debits and credits to keep accurate
books, but in terms of bookkeeping, this concept is more complex.
First, consider the definition of assets above. There are many types of assets,
ranging from the balance in your business’s main checking account, to the total
value of your inventory, to the value of your supplies and equipment, to the
value of all the sales you have made for which you are awaiting payment. As a
result, an accurate bookkeeping system will need more than just one account to
track assets.
Next, you may also have many types of liabilities, including accounts payable
and future sales, so you may have more than one account to record all your
liabilities.
Finally, in addition to assets, liabilities, and equity, your bookkeeping system
will have to keep track of revenue, expenses, gains, and losses.
Taken together, these categories of financial accounts – assets, liabilities,
equity, revenue, expenses, gains, and losses – comprise what accountants call
the chart of accounts and depending on the size and complexity of your
company, the chart of accounts can become fairly complicated.
One more step, and the importance of debits and credits will become clear.
Returning to the original example of shopping at your local department store,
consider what happens when you buy something with your debit card – the
amount of money in your checking account is reduced, but the amount of
money in the department store’s checking account is increased. In addition,
although you have less cash after making the purchase with the debit card, you
have increased the value of your assets by the value of the term you purchased;
and in return, the value of the store’s inventory has decreased by the value of
the time they sold. The difference in making the purchase with a credit card is
that instead of decreasing the amount of money in your checking account, you
increase the amount of money you owe; similarly, the store does not receive an
increase in the amount of money in their checking account, but they do see an
increase in the value of their accounts receivable.
Thus, the concept behind debits and credits is that every single transaction has
two parts – money is taken from one account, and money is added to another
account. Because a company’s books account for a potentially complex chart
of accounts, a system of debits and credits allows the bookkeeper to record all
transactions accurately and consistently.
Recording Debit And Credit In An Account
Figure 3: Free Image
First, remember that in accounting, debit is abbreviated dr. and credit is
abbreviated cr. Second, although it is common to associate debit with
deducting money and credit with adding money, debits and credits in
bookkeeping are used differently. Depending on which type of transaction the
company engages in and which type of account is affected, debits and credits
may either increase or decrease the value of any given account. Specifically:
● For asset accounts (e.g., your company’s checking account):
○
A debit will increase the value of the account; a credit will decrease the
value of the account.
● For liability accounts (e.g., your accounts payable account):
○
A debit will decrease the value of the account; a credit will increase the
value of the account.
● For equity accounts (e.g., the shares an investor holds in your company):
○
A debit will decrease the value of the account; a credit will increase the
value of the account.
This seems to be the reverse order of the way you may normally think of
debits and credits because it is based on the accounting equation, Assets =
Liabilities + Equity. Thus, you cannot increase your assets unless you also
increase your liabilities or equity. As a result, debits and credits within a
bookkeeping system function differently than in a simple check register.
Of course, in some cases, recording a balanced transaction may require
increasing the value of one asset account while decreasing the value of another
asset account (instead of a liability or equity account). In these cases, there are
additional rules that govern the function of debits and credits:
● For revenue accounts:
○ A debit decreases the balance and a credit increases the balance.
● For expense accounts:
○ A debit will increase the balance and a credit will decrease the balance.
● For gain accounts:
○ A debit decreases the balance and a credit increases the balance.
● For loss accounts:
○ A debit will increase the balance and a credit will decrease the balance.
Regardless, in terms of an actual book of accounts, debits are transaction
values that are entered on the left side of an account, and credits are
transaction values that are entered on the right side of an account.
Third, for every single transaction in bookkeeping, the total amount recorded
as a debit must be offset by the exact same amount recorded as credit. If the
two sides of the transaction are unequal, the books will not balance, and the
bookkeeping system will not accept the entry.
Let’s look at some specific examples to clarify the concepts above.
For the first example, let’s assume your company sells computer accessories.
One of your customers purchases a video camera attachment for a laptop
computer at a cost of $375.00. The sale results in an increase in the value of
your cash account. It also means that you have increased your revenue by
converting inventory into cash. To record this transaction using debits and
credits, the bookkeeper will use two accounts: cash and revenue. When you
sold the camera attachment to the customer, you received $375.00 in cash, so
the cash account is debited for 375. To record the associated increase in
revenue, the bookkeeper credits the revenue account for the same amount –
375.
Account
Debit
Credit
Cash
Revenue
375
375
Alternatively, the records may be displayed as follows:
Cash
Debits
Credits
375
Revenue
Debits
Credits
375
In the next example, let’s assume that your company needs 10 new servers,
and each server costs $1,000. You don’t want to use your cash account to make
this purchase, so you instruct your purchasing agent to buy them on credit. The
purchase results in an increase to the value of your fixed assets account.
Because they were purchased on credit, there will be an equal increase to the
value of your accounts payable. Here is how the bookkeeper will record the
transaction:
Account
Debit
Fixed Assets
10,000
Credit
Accounts Payable
10,000
Again, the same relationship can be displayed as follows:
Fixed Assets
Debits
375
Credits
Accounts Payable
Debits
Credits
375
Finally, here are some additional guidelines to help get you oriented to the
world of debits and credits:
Debit-Credit Table
Account Type
Increase
Decrease
Assets
Debit
Credit
Expenses
Debit
Credit
Liabilities
Credit
Debit
Equity
Credit
Debit
Revenue
Credit
Debit
Debit-Credit Acronyms
The following kinds of accounts (DEAL) are increased with a debit:
● Dividends
● Expenses
● Assets
● Losses
The following kinds of accounts (GIRLS) are increased with a credit:
● Gains
● Income
● Revenues
● Liabilities
● Stockholders’ Equity
Debit-Credit Rules
Recording a debit means:
● Increasing the value of an asset account
● Increasing the value of an expense account
● Decreasing the value of a liability account
● Decreasing the value of an equity account
● Decreasing the value of revenue
● Debits are always recorded on the left
Recording a credit means:
● Decreasing the value of an asset account
● Decreasing the value of an expense account
● Increasing the value of a liability account
● Increasing the value of an equity account
● Increasing the value of revenue
● Credit are always recorded on the right
Summary Of Debit And Credit
Double-entry accounting is generally used by businesses because entries
always affect at least two different accounts. For example, when a company
buys supplies, it affects the cash account and the supplies account or the
accounts payable account and the supplies account, depending on if they are
paying for the supplies now or in the future.
The double-entry system works using debits and credits. Debits are listed on
the left side of the account and credits are listed on the right. Debits increase
assets or decrease liabilities, while credits decrease assets or increase
liabilities.
It can be tricky to remember which accounts are credited and which are
debited. However, there are a few acronyms you can use to remember this
information.
Debits increase DEAL accounts, or Dividends, Expenses, Assets, and Losses.
These accounts are also decreased by credits.
Credits increase GIRLS accounts or Gains, Income, Revenues, Liabilities, and
Stockholders’ (Owner’s) Equity. These accounts are also decreased by debits.
What Is A Financial Statement
Financial statements of the collective term used to refer to a financial report
prepared by a business to gauge its financial performance as well as a position
at a specific time. Financial statements are prepared with the objective of
providing information about the financial health of a business to all those who
are interested in the business. It caters to the needs of the investors of
creditors, the internal team of management of a business, and also all those
other users outside the business. It is the main source of financial information
for decision-makers. Apart from this, it also helps check the accuracy and
reliability of the books of accounts.
Benefits Of Financial Statements
Financial statements help understand the financial status of a business. The
difference between success and failure is based on monitoring the financial
health for business. For instance, by properly analyzing the financial
statements, you can regulate the way the business spends money and deploy
funds towards those activities that are important for the development and
growth of the business. In this section, you’ll learn about the different benefits
associated with financial statements.
The balance sheet provides detailed information on everything that the
business owns and owes. The income statement shows the profitability of a
business, whereas the cash flow statement covers all finances engaged in
business from an accrual to a cash basis. It essentially helps measure the flow
of funds in and out of business. So, the first benefit of a financial statement is
the provision of a detailed analysis of the financial health of a business.
Since financial statements provide a bird’s eye view of the financial position of
a business, they are believed to be helpful while making business decisions.
They help identify any business trends, the rate at which the businesses are
collecting its receivables, any cash flow problems, and the rate of payment of
debts. For instance, any report associated with the Accounts Receivable bill
helped identify all those who are making timely payments and those who are
falling behind on their payments. By using this financial statement, you can
determine the list of customers who are in good standing and the ones who are
not. Financial statements essentially help with strategic decision-making.
Obtaining credit is an important part of running a business. After all, it is not
possible to cater to all the financial requirements of a business from the funds
available. Whenever a business applies for a loan, the first thing a lender or a
financial institution will look at are the financial statements. A balance sheet
shows the creditor all the debts the business has to repay. Apart from this, by
maintaining these internal accounts, you can ensure timely and prompt
payments of all debts and bills. This, in turn, helps improve the credit standing
of the business. Another advantage of preparing financial statements is that
they help with tax compliance. To calculate the quarterly state and federal tax
obligations, you require financial statements. Sales and annual taxes are state
tax obligations. Federal tax obligations include any taxes associated with
payroll and annual income. In case of an audit, all these statements come in
handy.
Limitations Of Financial Statements
The nature of the figures, along with the way they are reported, usually gives
the impression that financial statements are accurate, final, and precise.
However, that is not the case. Yes, the statement certainly has a lot of benefits,
but there are certain limitations that suffer from too. In this section, let us look
at the different limitations of financial statements.
Whatever the profit reported by the income statement and the financial
position disclosed by the balance sheet cannot be exact in that since these are
just an interim report. The exact position can only be determined whenever the
business is liquidated.
The balance sheet is also influenced by various accounting concepts. For
instance, fixed assets are always valued by using the going concern concept,
whereas detectors and stock in trade are valued using the conservatism
concept. Because of this, the balance sheet does not show the financial
position of the concern, as it usually claims.
The net income disclosed by the income statement is not always absolute but
is relative because the statement is the outcome of different conventions and
concepts used, proper recognition of revenue. The concept and conventions
affecting the calculation of income are many, the calculation of expired cost is
a tricky process, and the recognition of revenue is also affected by different
considerations.
Financial statements don’t record and reveal any fact that cannot be expressed
in monetary terms. For instance, important aspects of a business like the
quality of the work done by the employees, the efficiency of the Management,
their sales policy, the product or service quality provided by the company, and
so on are not exhibited in the financial statements. Anything that cannot be
expressed in monetary terms is effectively excluded.
Therefore, keeping in view all these limitations that financial statements are
far from, it can be concluded that the statements to the position of financial
accounting instead of the financial condition of a business.
Types Of Financial Statements
The four financial statements prepared by every business are as follows.
Income Statement
The income statement is also known as the profit and loss statement. It shows
the financial performance of a business in terms of net profit or net loss
incurred for a specific period. There are two main elements in an income
statement. The first element is the income. It refers to the revenue that the
business has during a financial period. The second element is the expense. All
the costs associated with running and maintaining the business are included in
this portion of the income statement. The balance of an income statement
essentially shows whether a business on the profit or sustain the laws during a
specific financial period.
Balance Sheet
The balance sheet is also known as the statement of financial position. As the
name suggests, it shows the financial position of a business entity at a given
time. There are three elements of a balance sheet, and they are the assets,
liabilities, and equity. Everything that business owns or possesses a known as
its assets..
Cash Flow Statement
The cash flow statement shows the movement of funds between the cash in the
bank balances of business over a period of time. There are three aspects of a
cash flow statement. These aspects are the operating activities, investing
activities, and the financing activities business has undertaken during a
specific period. Any cash flow from the primary activity of a business is
known as an operating activity. Any cash flow from the purchase or sale of an
asset is known as investing activity. Any cash flow associated with obtaining
and repaying debts in a business is known as a financing activity.
Statement of Retained Earnings
The statement of retained earnings is also known as the statement of changes
and equity. It essentially provides details about the flow of owners' equity in
business over a period. This statement is prepared by taking into account net
profit or loss, any share capital issued or repaid, payment of dividends, profits
or losses arising from changes and equity, and any effect caused because of
change in accounting policy or accounting errors.
Why Do We Need A Financial Statement
The financial statement of a business serves different purposes to a different
set of people and the statement is provided for dissemination. There are parts
of the financial statement that may be of interest to certain parties as they will
divulge that information that helps decision making, checking the status of the
company and planning.
In essence, the financial statement provides accounting information about the
company, which shows how the business is being run, the way cash and assets
are used and what is left after a certain period of time.
The production of financial statements is a collation of bookkeeping for a set
period of time. It is expected that a company provides its financial statement to
shareholders and the public, so the information provided for that period will be
collated and presented. That is why it is important to record every piece of
financial information and transactions in an ordered account method for ease
in using them to produce such information.
The financial statement is made up of different parts, which provide a different
interpretation of how the operation is carried out, the cash flow and how the
assets of the company are used.
The income statement is an important financial statement of the company and
one that investors are primarily interested in analyzing. From the income
statement, the profitability of the Company can be ascertained, as it shows the
volume of sale and how the company spends money - that is its expenses. A
good income statement shows that the company is healthy and can generate
income for investors who will be assured of profit in due time.
The income statement mentioned contains all the expenses the company has
operated on over time. With these statements, the person studying the
statement can find out the trends within the company. With such knowledge, a
decision can be made that will affect the business based on the knowledge of
how the company has been spending its cash in their expenses statement.
The balance sheet is another important financial statement that will show the
present state of the company at the period the statement was presented. This
statement will enable you to analyze the future of the company and if the
present way of running the business is sustainable. With this point of view, you
can make a decision on how the operation of the business will be handled.
From the statement, the liquidity of the business, its funding and debt status of
the company can be analyzed. Major decisions affecting businesses can be
made when such information is studied.
The statement of cash flow shows the cash movement and the purposes of the
operations made. A business owner will want to know the flow of cash and the
purposes that cash was used for and how this affects the business. Such
statements will determine specific spending in the next business budget. Such
statements are important to planning the next business period, after the
statement had been produced.
The financial statement contains all major information analyzed, which is a
compilation of data recorded over a period of time. All these statements are
important for the shareholders, public, investors and for the people running the
business.
The aggregates of financial statements are used for:
This can be used by investors to analyze the prices of the business if they
intend or are interested in investing in the business. The information is
required by the investors as they want to know how the business has been
faring over time and determine the profitability of their investments.
Government entities also require the financial statements of a business to
estimate the tax or exemption offered to the business. You can calculate your
tax returns, which will enable you check for errors by government entities that
come to analyze your accounts.
With proper financial statements, you will also be able to check for bank
errors, which will save you from paying more than you should pay.
Financial statements are required by lenders to determine if your business is
qualified for credit facilities. They will analyze your information to ascertain
that the information provided is accurate, which will determine the status of
the company to receive credit.
Financial statements provide the public with information on how the business
is being operated for a public company.
The financial statement is also essential for internal decision making of the
company. The statement, which provides information on how the company is
being run, will be used to make future decisions that will affect the business.
The financial statements are a compilation of various information and are used
for different purposes depending on who is viewing it.
Understanding Balance Sheets
The Balance Sheet shows you what the balances in your accounts are at a
specific moment in time. The easiest part of this report is that it’s set up
exactly like the accounting equation! We know that guy by heart by now! :)
Assets = Liabilities + Equity.
Below is an example of what Karen’s balance sheet looks like before we
started helping her. It records all of the information from the beginning of time
to the date listed at the top (September 30, 2019.)
Balance Sheet
As of September 30, 2019
ASSETS
Checking
1234
Account 4,921.23
Savings Account 0000
10,468.24
Cash on Hand
550.00
Accounts Receivable
0.00
Total Assets
$15,939.47
LIABILITIES
Credit Card
399.88
Accounts Payable
0.00
Total Liabilities
$399.88
EQUITY
Opening
Equity
Balance 2,561.72
Owner’s Investment
1,661.44
Owner’s Pay
-5,260.15
Retained Earnings
10,520.30
Net Income
6,056.28
Total Equity
$15,539.59
Total
Liabilities
Equity
+ $15,939.47
As you can see here, the Assets = Liabilities +Equity! It’s all shown here as a
beautiful report! :)
You may notice that there is an account on here that isn’t in our chart of
accounts--Net Income.
Net Income isn’t an account on it’s own. Net Income is the amount the
business owner gets when they subtract their expenses from their income. The
net income in this report will cover from January 1, 2019 to October 31, 2019.
(The net income from all previous years gets lumped together in Retained
Earnings.) Each month, the net income will change (brought over from the
Profit and Loss report) until the end of the year, when it is moved to Retained
Earnings as well. (Don’t worry, the main bookkeeping softwares do this for
you automatically.)
Let’s pretend that we run the Balance Sheet for October 31, 2019 (after we
have categorized all of Karen’s transactions.) This is what would change, with
explanations:
Balance Sheet
As of October 31, 2019
ASSETS
Checking
Account
1234
4,921.23 + 547.32 = 5,468.55
(We add the positive difference from the
transaction list.)
Savings
Account
0000
10,468.24 + 750 = 11,218.24
(We add the money she put in savings.)
Cash
Hand
on 550.00
Accounts
Receivable
0.00
Total Assets
5,468.55 + 11,218.24 + 550 = $17,236.79
LIABILITIES
Credit Card
399.88 - 134 = 265.88
(We subtract her credit card payment.)
Accounts
Payable
0.00
Total
Liabilities
$265.88
EQUITY
Opening
Balance
Equity
2,561.72
Owner’s
Investment
1,661.44 + 1,486.49 = 3,147.93
(We add the personal money she put into the
business.)
Owner’s Pay -5,260.15 - 1,200 - 1,200 - 116.34 =
-7,776.49
(We subtract the two times she paid herself,
and also when she bought groceries on
accident.)
Retained
Earnings
10,520.30
Net Income
6,056.28 + 2,461.17 = 8,517.45
(We add the Net Income from the Profit and
Loss report.)
Total Equity
2,561.72 + 3,147.93 +10,520.30 + 8,517.45 7776.49 = $16,970.91
Total
265.88 + 16,970.91 = $17,236.79
Liabilities +
Equity
And there you have it! Now that you know how to do all of this stuff, it’s time
to try it out for yourself!
What To Include In Balance Sheet Income Statements?
Prepare An Income Statement
An income statement helps report the revenues as well as expenses business
has incurred within a specific period. Therefore, it is also known as a profit
and loss statement. It is amongst the four major financial statements prepared
by a business. It helps determine the profit generated by a business during a
specific period. In this section, you’ll learn about the ten steps you must keep
in mind while preparing an income statement for the business.
Reporting period
Before you can start repairing the income statement, it is quintessential to
select the reporting period. A business can prepare its income statement on a
monthly, quarterly, or even yearly basis. By preparing a monthly income
statement, you can quickly identify any trends in profits as well as the
expenditures of your business. This, in turn, can help make better financial
decisions associated with the expenditures of the business. By identifying any
areas of the business when funds are being constantly drained out from the
business, you can take proactive measures to rectify this situation.
Creating a trial balance
Before you can prepare the income statement, you require a trial balance. The
trial balance is based on all the balances obtained from the different journals
and subsidiary books of accounts prepared during the process of bookkeeping.
It essentially gives the balance figures required for preparing the income
statement.
Revenue calculation
The next step is to determine the total sales revenue of the business during the
period for which the income statement is prepared. The revenue for business
includes all the money obtained from services rendered or products sold during
a specific period. Even if you haven’t received the complete payments yet, all
the sales completed will be included. By adding up all the revenue items from
the trial balance, you can effectively determine the revenue the business has
earned.
Cost of goods sold
The costs incurred in the form of direct labor, materials, and any other
overhead expenses included for the provision of goods or services are known
as the cost of goods sold. By combining the balance of all these items from the
trial balance, you can determine the cost of goods sold in the income
statement. This figure will be present directly below the revenue earned in the
income statement.
Gross margin
The total revenue minus the cost of goods sold provides the gross margin of
the business. This is the gross amount obtained from the sale of goods or
services provided by the business.
Operating expenses
All those costs are incurred by a business for the provision of its servers, and
day-to-day maintenance of the business operations is included in operating
expenses. It includes different expenses such as costs incurred for property
taxes, rents, utility costs, advertising costs, entertainment costs, travel costs,
and any other amounts payable to employees. Every cost that is directly
associated with the day-to-day upkeep of the business is known as an
operating expense.
Calculating the income
Once you obtain the gross margin, you must deduct the selling as well as the
administrative expenses from it. This provides the income your business has
earned. However, keep in mind that this is the income before the payment of
different taxes.
Different taxes
Once you have the income payable before income tax, you must make
provision for the income tax payable. Calculate the income tax; you merely
need to multiply the pre-tax income with the concerned tax rate in the state
where the business is located.
Net income
To determine the net income, you must deduct the income tax from the pre-tax
income your business is on. This is the final income your business has earned
during a specific financial period.
Income statement
To formalize the income statement, you must add a heading identifying the
report prepared as an income statement. Once you do this, include all the
details associated with the business, and it will provide the income earned
during the reporting period.
Income Statement Format
Revenue
(-) Cost of Goods Sold
= Gross Profit or Gross Loss
(-) Operating Expenses (Selling Expenses, Admin Expenses, Depreciation,
R&D, And So On)
= Operating Income
Other Income/Expenses
(+) Investment Income
(-) Interest Expense
(-) Taxes Payable
(+/-) Non-Recurring Events
= Net Income or Profit
Understand the Income Statement
Prepare A Balance Sheet
The balance sheet is a financial statement that paints a picture of the financial
position of a business. It takes into account the balances of different assets,
liabilities, and capital a business has. A balance sheet is always prepared on a
specific date for a financial period. A balance sheet is always prepared after
the preparation of the trial balance and the income statement. It doesn’t include
any balances associated with real personal accounts. A balance sheet is
prepared on a simple formula.
Assets = liabilities + capital
If this equation is not satisfied, then it is an indication of discrepancies in the
books of accounts. A balance sheet must always tally. Let us look in detail
about these three components of the balance sheet.
Assets
Anything of value owned by a business is known as an asset. It includes
tangible objects as well as intangible assets that are owned by the business.
Here are the different types of assets a business can own.
Fixed assets are all those assets that are acquired the higher business for longterm use. These as a not purchased with the intention of resale. Land and
buildings, furniture and fixtures, and trademarks and patents, plant, machinery,
or anything of a fixed nature that the business owns are all examples of fixed
assets.
Floating assets or current assets are those assets present in the business with
the intention of being liquidated at the earliest possible. The inventory a
business maintains, any amounts receivable from customers, and the bank
balances are all included in the category- current assets.
Liquid assets are all those current assets that are already in the form of cash,
which can be readily converted into cash like government securities or any
existing cash balance.
Wasting assets are certain fixed assets that have fixed content, such as a coal
mine. The value of this asset is influenced whenever the contents from it are
taken out. For instance, whenever all the minerals from as mine have been
extracted, then the mine will be rendered useless.
Intangible assets are those fixed assets that cannot be seen, touched, felt.
Goodwill is an intangible asset because even if there is no physical form to it,
its effect can be observed in business.
Fictitious assets are those assets that are valueless but are often included in
financial statements such as obsolete trademarks or expenses treated as assets.
Any expense that is treated as an asset is known as a preliminary expense, and
it is often incurred in the process of establishing a business.
Liabilities
Although the financial obligations of a business other than the owner’s points
are known as liabilities. Essentially, liabilities are all the debts of a business.
They include obligations to pay money, obligation to render services, or any
other claims against the assets of the business. Here are the different types of
liabilities of business might have.
Fixed liability is the term that’s collectively used to describe all such liabilities
which become payable upon the termination of the liquidation of a business. It
includes proprietor’s capital and shareholder’s funds. Apart from this, there are
long-term liabilities like long-term loans from banks that are not payable
within a period of one year.
For liability to be classified as a current liability, there are two conditions that
must be satisfied. Current liabilities are all such liabilities, which must be
repaid within a period of one year. The second condition is that these liabilities
must be paid out of current assets. By keeping these two conditions in view,
the long-term liabilities due for repayment within one year are termed as
current liabilities only when they are expected to be paid out of the current
assets of the business. However, any long-term liability that is to be discharged
from finances resulting from the issuance of any other long-term liability, then
it will not be classified as a current liability. Therefore, examples of current
liabilities include short-term loans from banks or bank overdrafts, this payable,
outstanding expenses due to creditors, taxes on income, and other amounts
payable trade creditors.
Equities
All the claims against all rights in the assets of a business are known as equity
is. Equity is a term used to include liabilities to creditors and to the owners of
the proprietors of the business. The former is known as critters equity, while
the latter is known as owners’ equity. Equity refers to any claim that the
following people have in a business.
●
The claim of an owner
●
The claim of a creditor
●
The claim of an owner and creditor.
By using this definition of the equity conversed in this section, the following
equation can be obtained.
Equity = assets
Shareholder’s equity + liabilities = assets
Tips To Prepare A Balance Sheet
Whenever you are preparing a balance sheet, here are a couple of tips you
must keep in mind to improve its efficiency.
A balance sheet must always be prepared at the same time every year. This
makes it easier to compare the financial performance of the business from one
year with the other yours. This, in turn, makes it easier for ratio analysis. If
you want to determine whether your business is growing or if it is suffering,
then you must be able to make financial comparisons. This is not possible if
there is inconsistency regarding the period within which the balance sheet is
prepared.
The credibility of the figures you use while celebrating the balance sheet
matters a lot. Whenever calculating the value of assets, try to use the current
values. Try to be as realistic about these figures as you possibly can. You can
either based on values according to the current market values or consider the
previous year's values and reduce the same by 5 to 10%. Likewise, you must
be consistent and realistic while assessing the real estate value of your
business, as well. If these values don’t display the true and fair picture, then it
fits the purpose of creating a balance sheet altogether.
Understanding The Income Statement
An income statement is a financial statement that reflects the profits, losses,
income, and expenses of a business during a fiscal period. The income
statement is also referred to as a profit and loss statement. The income
statement is easy to understand since it states only the revenue and expenses
accounts. This financial statement reflects the profitability of a business.
When revenues exceed expenses, the business is profitable. If expenses exceed
revenue, the business is running at a loss.
The income statement is a crucial part of a business's financial statements.
Used to list the income and expenses, it shows the net income and evaluates
the business performance by analyzing non-operating and operating activities.
Investors use the income statement since it provides a clear picture of a
business's profitability. This financial statement can influence investor's
decisions. The income statements are required from large corporations because
they provide users with the necessary details.
Why An Income Statement Is Important
An income statement is important in businesses because of the following
reasons:
Reflects the trends and patterns in business's finances. Since income
statements are prepared monthly, quarterly, or yearly, companies can use them
to compare past income statements with the present one. Comparison analysis
can provide a great deal of information regarding the status of the company.
Provides a clear picture of a business's financial position: Income statements
help businesses to determine their financial position. With this financial
statement, you can easily know if your business is doing well or not.
Helps to make crucial decisions: The income statement is an important
financial statement that helps business owners to make critical decisions. If
your business is not doing well, you can plan strategies and make decisions
that will improve your business's profitability.
Terms Used In Income Statements
Cost of Sales
The cost of sales states the cost of goods sold or services rendered by the
business. Depreciation expenses are also included in the cost of sales. For
businesses that produce goods, their cost of sales refers to the production of
goods. It adds the expenses incurred from purchasing raw materials, labor, and
manufacturing.
Retailers and wholesalers are also concerned about the cost of buying and
reselling the products. Meanwhile, for businesses that render services, the cost
of sales refers to the cost incurred from creating and rendering services to
customers.
Net Sales
Net sales are the sales or income of a business. It reflects the sales of goods
and services in a specified period. It reflects the profitability of a business.
Income Taxes
The income tax in the income statement is the estimation of income tax for the
financial period.
Gross Income
It is also called gross margin or gross profit. The gross income is derived by
calculating the difference between the cost of sales and net sales. Gross profit
is the money available in a business that can be used to pay off expenses that
might be incurred. The greater the gross profit, the more the net income.
Net Income
This is an important aspect of the income statement. The net income lists all
operational and non-operational income and expenses and then calculates the
difference. When income exceeds expenses, the business is running at a profit;
if income is less than the expenses, the business is running at a loss.
The Cash Flow Statement
The cash flow statement refers to a financial report that states the amount of
cash earned and spent in a company. It reveals how cash is moving into and
moving out of a business organization. It is also called the statement of cash
flow; it is one of the primary financial statements used by financial analysts.
The cash flow statement reflects and evaluates how an organization manages
its cash. It reveals how the performance of the balance sheet accounts and
income statements influence the flow of cash. Accountants, shareholders,
potential investors, analysts, employees, creditors, and contractors are the
people interested in the statement of cash flow of an organization.
This financial statement is specifically designed to offer the necessary
information on a business's solvency and liquidity. The cash flow statement is
primarily concerned about how cash is generated and spent.
The Main Components of the Cash Flow Statement
The cash flow statement is divided into three major components, which are:
The flow of cash from operating activities
The flow of cash from investment
The flow of cash from financing activities
The cash flow statement sometimes adds a disclosure of non-cash activities as
part of the components according to the Generally Accepted Accounting
Principles. The cash flow statement is different from the balance sheet account
and the income statement.
Cash Flow from Operating Activities
Operating activities involve the manufacturing of goods, sales of goods,
receiving payments from customers, and delivering the products of a company.
These are activities that generate revenue for a business. These activities have
to deal with purchases, sales, and expenses that will generate revenue for the
business.
These expenses can be advertising, shipping the goods, purchasing raw
materials, and building inventory. Cash flow from operating activities is the
cash generated from the income of a company; it excludes costs related to
investment in securities or investment on capital items.
The flow of cash from operating activities can be derived by using the direct
and indirect method. The direct method reflects how the in-flow and out-flow
of cash in the business affect all liability and current asset account. The
indirect method reflects how profit is reconciled with cash flow.
Cash Flow from Investing Activities
Investing activities include loans given to suppliers, the sales of assets,
purchases of assets, payments linked to acquisitions and mergers, and
dividends received from another organization. Cash flow from investment
refers to activities that are linked to the sale or purchase of capital assets.
Investing activities refer to activities that generate gain over a long-term
period. They lead to changes in non-current assets like equipment, government
bonds, investment in shares, etc. Investing activities have nothing to do with
cash from external investors like shareholders or bondholders.
For instance, if a company pays out a dividend to its investors, this type of
activity is not an investing activity; it is called a financing activity. Examples
of investment activities include cash generated from selling an asset, cash
spent on the purchase of an asset, cash generated as a result of the merger, cash
generated from another company's acquisition.
Cash Flow from Financing Activities
Financing activities refer to events that lead to changes in the composition and
size of the capital. Financing activities involve taking out loans, issuance of
shares, paying dividends, etc. When a company extends credit to a customer, it
is not a financial activity; it is an investing activity.
Cash flow related to repaying loans, borrowing, and issuing of shares is
classified as cash flow from financing activities. Financing cash flow reveals
the sale or purchase of stock in a company.
How to Calculate Cash Flow
In accounting, cash flow can be calculated by adjusting the net income. The
working cash flow is revealed in the statement of cash flow. The working cash
flow reflects the in-flow of cash during a particular period. There are two
methods of calculating operating cash flow. These methods are direct and
indirect.
The direct method derives information from the income statement by making
use of cash disbursements and cash receipts. In the direct method, different
kinds of payment received and made through cash are added. You can
calculate these payments and receipts by making use of the balances of
different business accounts.
In the indirect method, working cash flow is calculated by deriving the net
income from the income statement of an organization. Because the income
statement of an organization is always made on an accrual basis, income is not
recorded when it is received; it is recorded when it is earned. The indirect
method is not a straightforward method of calculating operating cash flow.
The Importance of Cash Flow Statements
Investors are always concerned about the cash flow of an organization.
Positive cash flow is a good sign for investors because this shows that the
organization generates cash from its day-to-day operations. Working cash flow
can give a clear picture of an organization's profitability.
The purpose of preparing a statement of cash flow is to evaluate the sources of
cash and how cash is utilized in a company over a particular period. The cash
flow statement is one of the most important financial statements in accounting.
Investors depend on this financial statement for making decisions because of
its transparency.
The statement of cash flow helps to determine the solvency and liquidity of a
business. It provides the necessary details for accessing a company's liabilities,
assets, and equity. With the cash flow statement, businesses can determine the
trends of their performance. This financial statement also predicts the timing
and amount of cash flows in the future.
A business can only be successful if it has enough cash. Cash is needed to
make business transactions like paying expenses, paying taxes, purchasing
assets, and paying loans. With a cash flow statement, a business can determine
the amount of cash available and how cash is generated and spent daily.
A business that lacks enough cash cannot make business transactions, and with
time will go bankrupt. Without cash in a business, such businesses will need to
borrow money to make some business transactions; this is not healthy for a
business. The cash flow is useful in businesses and big organizations.
Bottom Line On Financial Statements
These are considered the big four because they are going to give you a good
picture of where your business is standing financially. They are also the
statements that you need to show your investors to make decisions about
whether they will work with you or not. Let’s take a look at each one and see
how they work and why they are so important for your business.
You must make sure that you fill out these financial statements on a regular
basis. Most companies will do one each quarter of their business, and then
they do this at the end of the year. There are several benefits to doing this.
First, it is required for all publicly traded companies through the SEC. You
need to submit these four documents to the SEC at these times to remain on
the stock exchange.
You will find that a lot of your investors and lenders will take a look at these
financial statements. They are able to get a good view of your financial state
and can make smart decisions about whether they want to invest in you or give
you a loan. Without this information, the investors and the lenders won’t even
consider you. So even if the SEC didn’t require that you submit this
information to them, it could still be useful if you need a business loan to fund
something, like new equipment or expansion or to help convince investors that
your business is a good option.
Another benefit of using these financial statements is that they give you a good
view of your financial statement in the business. You will be able to fill them
out pretty easily if you have been keeping good records through the other tips
that we talked about. You can then compare this information with the financial
statements that you completed in previous quarters and years to let you know
the trends of your financial state and make good decisions to prepare you for
the future.
Choose A Bookkeeping System
There are two recognized systems of GAAP-compliant bookkeeping: singleentry and double-entry. We will explore the pros and cons of both systems in
this section. We will also discuss the strengths and weaknesses of online, webbased, and digital bookkeeping systems.
Single-Entry Bookkeeping
A single-entry bookkeeping system is the most informal of all bookkeeping
systems. If you have a checking account, the check register is a great example
of single-entry bookkeeping. All the transactions in the check registry provide
information about only the one checking account. Whether the transaction is a
deposit resulting for a business transaction; from a personal or professional
investment; from a business or personal loan; or from interest paid on the
account or dividends received from investments in securities, all the
transactions are listed chronologically, with a small space for description of the
transaction, and a column on the right to show how the transaction affected the
balance in the account.
Withdrawals are tracked the same way – whether a withdrawal results from a
direct withdrawal from the bank for personal or business use; for payment of a
bill for operating expenses for your business; form a purchase made for
equipment or office supplies; from payments for loans, interest, or taxes; or
from the purchase of investments, all the transactions will be listed
chronologically; again with a small space for a description of the transaction;
and a column on the right to show how the transaction affected the balance.
This method of bookkeeping is fairly straightforward and can be an effective
means of showing accurately where money comes in and goes out each month.
However, with the prevalence of online banking, we have all encountered the
difficulty of keeping track of all transactions in a simple check register.
Previous top widespread access to online banking, most deposit transactions
were made in person at the bank, and most withdrawals were conducted by
mailed checks. This level of control over financial activity made the singleentry system a more viable option for individuals and businesses over a much
broader range of business contexts. The contemporary environment requires a
reassessment of whether a single-entry system is right for you.
Advantages:
● Single-entry bookkeeping uses a simple and easy-to-understand method of
keeping track of transactions.
● Small businesses that have only one major financial account may be able
to save time and expense by using this system effectively.
●
A single-entry system can be adapted for larger companies by creating
separate single-entry systems for each business account.
Disadvantages:
●
Single-entry systems do not provide a means of including detailed
financial reporting.
●
Bookkeeping errors can be very difficult to locate and usually involve
reconciling bookkeeping records with bank statements.
●
Single-entry systems do not provide an effective means of creating
projections of future financial performance.
●
Single-entry systems generally track only cash accounts. Other assets, as
well as liabilities, equity, income, and expenses go unreported in these
systems.
Double-Entry Bookkeeping
Especially in a globalized, digital environment, it is common even for small,
local businesses to have many accounts with different suppliers, service
providers, and customers, often from different locations and even different
countries. In addition, the increasingly self-service nature of investing and
business administration can mean that even small businesses may have to take
on considerably greater responsibility than in previous eras. Regardless, the
larger and more complex your business, the more likely a double-entry system
will allow you to consistently maintain reliable books. Most companies use the
double-entry system.
In the section above, we used the analogy of a check register to describe the
single-entry system. Using a double-entry system, the transactions in the
previous example represent only half of the entire bookkeeping process. For
example, if you made a deposit into your checking account for payments
received from customers for good and services sold, the record of the deposit
into the checking account (a single-entry) is only half of the transaction record;
in order to balance the books, there needs to be a second-entry is a
corresponding account. The idea behind double-entry systems is that putting
money into one account necessarily means that money was taken from another
account and vice-versa. Double-entry bookkeeping allows you to show both
sides of the transaction. So, when a company makes a deposit resulting from
sales, revenue can be credited for the same amount the checking account was
debited, which results in a balanced record of the transaction. Similarly, if the
business owner pays an outstanding bill for shipping, the double-entry system
will record a credit to the checking account and a debit to the accounts
payable.
Advantages:
●
Provides a more complete system of recording all of a company’s
financial transactions, not just deposits and withdrawals to the main checking
account.
● Provides a means of producing accurate and reliable financial statements.
● Provides an effective means of pinpointing internal accounting errors.
● Provides a means of accurately assessing a company’s financial condition.
Disadvantages:
●
Double-entry bookkeeping is more complex and may take more time to
learn.
Choose An Accounting Method: Cash Or Accrual
Cash-Based Accounting
Under this accounting system, you only record revenue/income and expenses
whenever there is an actual exchange of cash. You only record expenses and
purchases when you have paid cash for them and income when a customer has
paid for the goods/services.
For instance, if Mr. A buys a product or receives a service from you in January
but does not pay for it until May, you would have to wait until May when Mr.
A pays for it before you record the transactions.
Benefits of Cash-Based Accounting
Using the cash-based system of accounting has some advantages:
Very simple and uncomplicated such that you can easily handle your
bookkeeping with zero accounting knowledge/experience.
You don’t need complex software or accounting records; oftentimes, all you
need is your check booklet.
Naturally, everything that has an upside also has a downside:
Downsides of Cash-Based Accounting
Cash-based accounting is not always advisable to use because it provides
insufficient records and does not really provide a true and clear picture of what
is really going on in the business. For instance, you could erroneously report
that your business made losses in January because you were yet to receive
payments for the products/services sold.
Cash-based accounting also focuses on revenues and expenses alone and
ignores other aspects of the business such as assets, inventory, liabilities,
equity, and so on.
It also does not conform to the generally accepted accounting principles (GAP)
or international financial reporting standards (IFRS).
Which Types of Businesses can Use Cash-Based Accounting System?
Legally, only a few businesses have the green light to use the cash- based
system of accounting. You can use cash-based accounting if your business falls
within any of the following categories:
Sole proprietorship with annual average gross receipts of less than $1,000,000
S-Corporation with annual average gross receipts of less than $1,000,000
C-Corporation with annual average gross receipts of less than $5,000,000
A company not publicly traded or not under any obligation to make full
disclosure to the IRS
Family-owned farms with annual gross receipts of less than $25,000,000
Accrual Based Accounting
Under the accrual based accounting system, you record transactions when
earnings are made and expenses are incurred, not when they are paid for.
In this case, dollar bills or checks do not have to exchange hands before you
record such transactions; every time a transaction occurs, you have to record it
in your books.
For example, let’s assume YXL Ltd. hires you to repair some of its equipment
in January and you charge them $5,000 for this service. However, YXL Ltd.
does not issue a check immediately but promises to discuss it with the
financial accountant and then get back to you. This system of accounting
requires that you record this transaction in your accounts receivable books as
soon as you complete the job whether YXL makes payments for it or not.
There are two major account items you have to record when using the accrual
method of accounting:
Accounts Receivable: Account receivable would include all the monies owed
to your business not paid.
In this example, as soon as you send out your invoice for the sales of a product
or service, you record the value in your accounts receivable ledger.
This account helps you track everything owed to your business.
Accounts Payable: Account payable is the exact opposite of accounts
receivable. Here, you record all the monies your business owes to other
people.
As soon as you receive an invoice or make a commitment to the other party,
you have to record the transaction in your account payable book so you can
track what your business owes to other people.
Benefits of Accrual Based Accounting System
Using the accrual based system of accounting has many benefits.
For starters, the accrual based accounting system produces a more accurate
and reliable accounting report, and gives a true and clear picture of the
performance of the business.
It also provides a basis for comparing your accounting results.
Downsides of Accrual Based Accounting System
This method of accounting is usually harder and more complicated than the
cash based method of accounting where you only need to record cash
transactions.
Which types of Businesses Should Use Accrual Based Accounting System?
Use the accrual based accounting system if your business is:
A C-corporation
Your business has inventory
You are obligated by the IRS to make full disclosure of your business.
Your business has gross sales revenue that is higher than $3million every year.
Organize And Store Your Documents
A lot of entrepreneurs struggle with bookkeeping and maintaining a record of
financial transactions. According to a survey, only 40% of small business
entrepreneurs feel that they have the required in-depth knowledge of
bookkeeping and business accounting. Which brings us to the next point:
being a successful business owner is not equivalent to being a successful
bookkeeper.
However, effective bookkeeping is the key to a successful and thriving
business. This is why most business owners either learn bookkeeping and
implement it by themselves or hire accounting firms or professional
bookkeepers to do it for them. To be good at business, you need to be good at
money-making. Running a business smoothly requires years of tried and tested
strategies, a disciplined and organized mindset, and a lot of expertise.
Running a business with accounting loopholes hinders its productivity and
success rate. This is where the implementation of good bookkeeping practices
proves its significance. It is imperative to a business that it employs the best
strategies, the most effective tools, and regular account management practices
to run smoothly and successfully.
Understand The Importance Of Keeping Accurate Financial
Records
For this purpose, it is best to work with a team. The responsible parties must
know and be trained to keep accurate financial records effectively. It is
significant for a business owner to realize the importance of keeping accurate
and updated financial records because eventually, it relies on them to
implement the best bookkeeping practices within their organization.
When financial reports are due for a review by the management team, the
records should be ready and updated. Mapping out a schedule for this purpose
could prove to be crucial in ensuring that the financial data is reviewed on time
and routinely to identify the trends in the business' cash flow.
Only when a business owner is well-informed of the trends, status, and cash
flow of their business will they be able to make informed and effective
decisions.
Keep Track Of Profits And Expenditures
Records of profits and expenditures of your business are the essential
information listed in your book. You can note it in a diary or a ledger to
document your credit and debit activities. To record profits, you must maintain
an Accounts Receivable column in your ledger and note down the money you
are to receive from your clients.
It is imperative to keep an updated record of your profits and expenditures.
Maintaining updated records of the money your business spends and that it
earns helps you stay in the loop about the progress of your business and
determine its success rate.
If You Are Not Ready – Outsource
Bookkeeping is a tedious and time-consuming process. So if you feel like it is
not something you particularly like doing, or think you are not good at it, it is
better to outsource your accounts to independent accounting firms or hire a
professional bookkeeping service to handle your financial records. Keeping
bookkeeping records, especially when you run a large-scale business, is
challenging.
Most large-scale business owners tend to outsource their books because they
feel spending time on bookkeeping is keeping them from money-making and
being more productive for their business. As a result, a lot of entrepreneurs
leave bookkeeping to professional bookkeepers and accountants or outsource it
to a firm specialized in maintaining accounts.
On the other hand, a lot of small business owners tend to do their own
bookkeeping. It saves them a lot of money and time because
1. Their financial records are comparatively precise and not as extensive as
those of large businesses
2. Doing their own bookkeeping keeps them in the loop and enables them to
make decisions that could their business grow.
However, as the business grows, entrepreneurs prefer to spend their time
making more sales instead of maintaining the books. Sometimes, you make
errors in bookkeeping. Fixing those errors requires time most business moguls
don't have. Therefore, in lieu of doing their own bookkeeping, they hire
proficient accounting firms to handle the accounts for their businesses.
Always Be On The Lookout For Business Apps
Business apps are specially integrated with different accounting software
packages to give you improves results and assist you in bookkeeping. It takes
these apps only a fraction of the time it may take you to perform these tasks
manually. For instance, a time tracking app allows you to maximize your work
potential and increase profitability without having to go to great lengths and
implement procedures that would enable you to do so.
Business apps that provide you feedback regarding your billing hours and
more valuable data are the most resourceful. They allow you to draft future
proposals, bill clients, verify vendor bills, and evaluate what works for your
business and what does not.
Maintain Accurate Documentation Of Inventory
Inventory management is an elementary part of a business, especially small
businesses that need to maintain an accurate record of all inventories to cease
overproduction, product misplacement, and stealing. Maintaining your
inventory holdings allow you to keep track of sales trends and devise your
business strategies by analyzing these trends.
Keeping an accurate record of your inventory helps you maintain information
about stock statistics, purchase and sales costs, and dates purchased. Updated
documentation of your inventory will keep you informed of the figures and
enable efficient decision-making regarding merchandise.
Document Your Purchases
Any material, whether raw or processed, you buy for your business must be
mentioned in the books to keep track of your purchases. It is an important part
of running a business and helps you determine your company's sales and
profits.
Eventually, every business, through trial and error, develops a method of
bookkeeping that works for them and does the job efficiently. The entire
process of getting there, however, requires the implementation of effective and
advanced techniques that would enhance your accounting methods, add to
your expertise, make business handling easy, and provide room for the
business to grow.
If you find documenting your purchases and keeping your books updated
difficult and time-consuming, you can always hire the services of outsourcing
account companies to handle your company's bookkeeping on your behalf.
Do Not Overlook Account Reconciliation
Account reconciliation is one of the most important yet neglected tasks on this
list. It allows you to look over all financial transactions and ensure you have
fully accounted for everything. It helps you restore order to hurried, haphazard
bookkeeping, and review all financial details.
In addition to reconciling your bank accounts, you should also conclude it with
an ending balance. This should apply to all business accounts, credit and
debits, payroll liabilities, loans, and more. The best way to do account
reconciliation is to go through your finances every day. Waiting till the end of
the month will add to your workload, so try doing daily reconciliations.
Use Bookkeeping To Grow Your Business
If you have mastered even half of these strategies, you are already hitting all
the right places with your bookkeeping. In that case, it is time to take your
bookkeeping to the next level. You can take your bookkeeping practice and
turn it into an effective tool to grow your business.
It is time you take these reports and perform an analysis to see how it could
help your business grow and prosper. Once you have performed the analysis, it
is time to draw some conclusions, prepare reports, have your team members
deliver their reports to you, and observe the pattern it incorporates into your
business. You can then use these trends to further your business, hit some
major goals, achieve milestones, and prepare yourself for the future.
A lot of businesses want to know if they need improvement, what areas need
to do better, and how to go about doing it. But they have no way to determine
if they are doing well. For this purpose, you can review your financial reports,
develop a budget, and then compare your business' performance to the set
budget. There is no way to determine if your business is doing well when you
don't have the goals to measure up against it.
Categorize Your Expenses
Categorizing makes everything simpler and easier. Putting your expenses into
categories will make it easier and faster for you to keep a record of your
company's finances. It will also make your bookkeeping neat and more
efficient.
Sometimes it takes business owners years to realize the importance of sorting
their expenses into relevant categories. Each year they file different expenses
under different labels, and then they have to sort through years of expenses to
do everything correctly. Categorizing the money your business has spent will
make it easier for you to sort through the books later.
If You Outsource Your Accounts – Don't Be Hands-Off
Outsourcing your books and getting it done by a hired professional does not
mean you should completely overlook your responsibility in bookkeeping.
Since you are the business owner, it would be ideal if you would do the
bookkeeping by yourself. But running a large enterprise and doing its
bookkeeping is a handful.
So, as mentioned before, most large business owners outsource their books.
But they still must take ample interest in their company's financial records.
They must have a look through them once a month, or maybe on alternative
months, or quarterly basis – whichever works for them. It is imperative for the
owner of the company to be fully aware of the numbers. It helps them
determine the financial standing of the company, which includes profits,
losses, payables, receivables, etc.
They can work alongside their accountant to determine their future business
goals and how to achieve them.
Keep A Tab On The Receivables
Invoice raising and timely collection is a sign of a good account receivable.
Working efficiently ensures effective cash flow in the company. You must
maintain a record of all the invoices, their terms of payment, and if you paid
them completely or just partially.
Receivables are not just about receiving payment. They are to hold you
accountable for the money coming into the business and to make sure no
payment is released without a proper invoice.
Always Create Backup Archives For Bookkeeping Files
Never leave your bookkeeping files without a backup. Either set up an
automated backup or run regular backups to have your files saved in case of a
system crash. Mishandling the files, system failure, and other possibilities can
lead you to lose a lot of important financial evidence and account statements,
which is why it is always recommended to create a backup of your
bookkeeping records.
You must always create at least 2 to 3 duplicates or more of your books. This
way, you can have your records stored in different hard drives or memory
devices. If an incident such as a system crash does occur, you will always be
able to retrieve your bookkeeping files. A printed copy works even better. It
will give you a paper trail of all accounting records and will make it easier for
you to catch up on your transactions without taking too much time.
Self-Audit As Much As You Can
Self-auditing will save you a lot of trouble in the long run. It is best to look
over your accounts and take note of all your accounting loopholes and
bookkeeping errors by self-auditing before doing anything else. Once every
month, sit with your books, sift through your financial transaction,
meticulously check each entry, and determine if anything needs to be altered or
if something is missing from the books.
This will keep you in the loop about your business' finances and help you
rectify errors. This practice will also prevent your business from encountering
any discrepancy or suffer through an accounting setback. Before going for
help to any bookkeeping expert or seeking help from professional
bookkeeping services, self-audit and look over the financial transactions by
yourself.
Keep Personal Transactions And Business Transactions Separate
People owning a small business tend to mix often personal and business
accounts. This is one of the most important problems to be considered because
putting in single entries for both personal and business transactions is a
financial debacle. It will be confusing when you will later go over the books
and have a hard time differentiating one finance from the other.
It is best that you maintain separate accounts for both personal and business
transactions. Opening a separate bank account and keeping separate books and
statements for your business and personal expenditure will help you run your
business effectively.
Choose The Right Bookkeeping Software
One of the most effective strategies is to pick the right bookkeeping software.
It should be your first priority to pick the software that is suitable for the size
of your business, the relevant industry, and your financial data. It is not as
extensive or difficult to find the right software. The purpose of bookkeeping
software is to make your life a little easier and make the process less tedious
and tiring. You must select the software that automates and optimizes you're
your entries and makes keeping financial records simple.
For business owners, especially those who do their own bookkeeping, time is
of the essence. They must carefully pick effective tools that would help save
their time, energy, and make handling the finances efficiently. When looking
for the software, you must take its skill, technical ability, and features into
account.
Bookkeeping software should provide the following results:
● Must manage multiple clients and businesses using a single login
● The software must fit all your requirements
● Must save time and make bookkeeping efficient
● Should be smart, quick, and easy to use
● It must provide Cloud-based access everywhere
● Must allow easy sharing of MIS reports
Make Timely Payment of Bills
Ignoring your bills is tempting, but leaving them unpaid is not a strategic
bookkeeping move. The longer you wait, the more unpaid amounts assemble,
and the worse it gets for you to keep a record of all your unpaid dues.
Irrespective of whether it is a credit charge or a late fee, make sure always to
make your payments on time.
In the long run, the amounts you have left unpaid will hurt your bookkeeping
practice as well as your business. The longer you wait, there will be more
unpaid charges due to the rate of interest. All in all, in the end, you will have a
huge bill to pay with added charges, interest, and arrears charges. If you are
handling your business alone, it can be difficult for a single individual to pay
everything at once.
Precaution is always good, but what's better is to be punctual with your
payments. To avoid any unnecessary trouble, keep clearing your bills from
time to time.
The aforementioned strategies are simple steps that will maximize your
business' effectiveness, help you grow your business, save time, and make
bookkeeping easy for you. When handling your company's records, it is
always best to team up with someone to go over the books once. Sometimes,
another set of eyes picks up on errors one may overlook.
On the other hand, if you are not handling your books and have hired a
professional service to do it, you must always schedule reviews with your
bookkeeper to have a clear understanding of your business and learn of its
potential to grow.
Organize Potential Deduction
When you file income tax at the end of the year, you should be able to deduct
the expenses associated with running your business from the total revenue
earned. When you report a lower total revenue, you will be less in taxes. The
following are the types of business expenses the IRS allows you to deduct on
our tax returns:
●
Business start-up costs. The types of costs associated with start-ups vary
depending on the type of business but may include:
○ advertising
○ travel
○ surveys
○ training
○ asset purchases
●
Depreciation. If you purchased assets that will last longer than one year,
you can claim as start-up expenses. However, you can claim the value of
depreciation for such assets. Typically, asset depreciation is claimed for the
following types of assets:
○ office furniture
○ buildings
○ equipment and machinery
●
Business use of home. If your home is your principal place of business,
you may be able to claim certain tax deductions, but you will have to provide
documentation that shows:
○ what business services are performed at your home.
○ how your home has been converted to business use.
●
Car and truck expenses. Keeping accurate records of your car and truck
usage can also help you find ways to save money. The following types of
business-related travel expenses are deductible:
○ depreciation
○ lease payments
○ registration
○ garage rent
○ licenses
○ repairs
○ gas
○ oil
○ tires
○ insurance
○ parking fees
○ tolls
Comon Bookkeeping Pitfalls To Avoid
Mistake #1- Not Reconciling Your Accounts
Reconciling is the process of matching your transactions in QuickBooks with a
source document- usually a bank or credit card statement.
This simple function is the way you make sure the balances you are seeing in
your books actually match with reality. The longer you go without reconciling,
the more likely it is the books are off- maybe way off, depending on how you
do things.
One of the very first things we check with any new client is whether the books
have been reconciled correctly or not. If the answer is no, 99% of the time
there are mistakes in the books we have to find and fix.
Mistake #2- Not Using Sales Tax Correctly
Sales tax is a little bit of a tricky concept in accounting because although you
get the money, you handle the money, and you deal with the money - it isn’t
yours. So you need to account for it as though it isn’t and not lump it in with
the rest.
The problem is the sales tax funds are mingled right in with your funds and it
all looks the same. If you are creating invoices and collecting sales tax that
way, it is easier to keep it straight. Make the appropriate items taxable and
make sure when you pay your sales tax, you are reducing the sales tax liability
account. There are lots of lessons online on how to do this correctly
Mistake #3- Not Handling Loans Correctly
More than half of all small businesses have at least one loan of some kind that
they need to track, but very few of them are set up correctly.
These could be loans to start the business, a loan for a car, a loan for
equipment or even an SBA loan to buy the business in the first place.
No matter what it is for, all loans have several parts to them, most of which get
skipped. In fact, there is the loan beginning balance, the principle repayment
and the interest expense that need to be accounted for in the books.
Mistake #4- Not Using Invoicing Right
There are two common mistakes (and then lots of less common - but still
problematic - mistakes) people make with invoices, although invoices
themselves are pretty simple.
An invoice is a request for payment for products or services or both. The trick
with invoices is that as soon as you create one, it counts as income, even if you
haven’t been paid a cent.
Mistake #5- Not Doing Payroll Right
Paying payroll is one of the basic functions of having a business for a lot of
business owners but it is also one of the more misunderstood aspects of small
business.
The first mistake people make is calling things payroll that aren’t. Unless you
take payroll taxes and withholdings from a checkand the person you are
paying is an employee of yours and has given you a W-4 form, the check isn’t
a paycheck. Lots of payments to people get called paychecks that aren’t
actually paychecks. Maybe they should be, but they aren’t!
Mistake #6- Not Tracking 1099s
1099s are issued to individuals or companies that provided you with services
during the course of the year that added up to $600 or more in total payments.
Employees and corporations are exempt, as are product purchases. Some LLCs
are exempt. Law firms are normally not exempt. The rules start to get a little
tricky and change a bit every year on who qualifies.
Mistake #7- Not Using Assets Correctly
Assets have specific definitions in accounting, but most people don’t realize
what they are and this is where mistakes happen. Most people think of assets
simply as “things I have” but that doesn’t get specific enough for accounting.
Mistake #8- Not Using Equity Right
Equity represents your ownership in your business. It is the section that comes
after liabilities and just before income in the chart of accounts.
Loan Payments
Most sellers start using their own money but occasionally someone will get
money from a friend or relative to start the business or to buy inventory or
something. Or, they may borrow funds against a car, house or get credit from a
vendor.
In these cases you want to record the amount you got and also any repayments
you make or interest you pay.
Let me start with an investment first because It is easier. If someone gives you
money to start or grow your business and they are not going to be getting paid
back on an agreed schedule or if they explicitly are buying part ownership in
the business then you will use an equity account. When you record the deposit
for the money they give you, the account it goes to is an equity type account.
Whether they are a partner, member or shareholder depends on the type of
entity you have.
Whichever it is, make sure you record every time they put money in so you
have a running total of their investment. If they are coming on as a partner,
make sure you have a partnership agreement in place and everyone is crystal
clear on roles, responsibilities, profit sharing future partnerships, etc. before
you take a dime.
If the money coming in is a loan, then when you record the deposit the account
it goes to is a liability account. If you expect to pay it back in a year or less, it
is a current liability. If you expect it to take a year or more, then it is a regular
liability.
When you start making payments back, if you are paying interest then be sure
to split each payment into the principal portion and the interest portion and
record the amount going to each account. The principal portion should go to
the original loan account to reduce the balance. The interest portion goes to an
interest expense account and is a tax deduction.
For example, if you are making a loan payment of $225 you might have $200
going to reduce the balance $25 going to interest. If the total loan amount was
$2000, in ten payments you will have paid off the loan and also paid $250 in
interest.
The mistake most people make with loans is they record the loan payments but
they never recorded the original balance. Or they do not split the interest. Or
worst of all they record the original loan deposit as income and then it looks
like you owe income tax on money that was a loan! If you need help here, just
ask us!
Paying Yourself & Others
How you get paid by the business depends on what type of entity you are
operating. If you are a sole prop, the money in the business is your money
whether you take it out or leave it in the bank.
You can transfer it as needed to your personal account to spend on personal
stuff but if your business is making money be sure to set aside a good chunk to
pay taxes. As a sole proprietor you are also going to charged self-employment
tax which means you are going to be paying the government for Social
Security and Medicare and a few other things and not just the portion that
would normally come out of a paycheck but also the portion that the employer
would normally pay. This adds up to be about 15% of your total profit!
So for example, if the business makes $50K as a sole proprietor you are going
to pay $7500 in self-employment tax aside from any state or federal income
tax you might owe!
If you are an LLC you make take your money in the form of profits and/or
guaranteed payments. Again, you are going to end up paying self-employment
tax on this money in addition to income tax.
If your LLC is set up to be taxed as an S Corp, or you are an S Corp, then once
the business starts to make some money you can put yourself on payroll. For
the amount you take as payroll, you are also going to be paying the selfemployment taxes (half as the employee and half paid by the corporation
which is also essentially you!). But, with a corp, you can also take money out
as a distribution, which is payroll tax free!
This is one of the big savings you can get from a tax perspective as an S Corp
or LLC taxed as one. You can pay yourself a smaller amount of payroll and
take the larger portion of your income as distributions.
In the example above, if the business made $50,000, you could take $20,000
as salary and pay $3,000 in payroll taxes and the other $30,000 in distributions
and pay no payroll taxes. In that case you have saved yourself $4,500 in taxes!
The catch is you must set up payroll and pay payroll taxes and file your
payroll tax forms and in all ways be a legitimate employer paying payroll. This
does take some time and work and effort if you do it yourself. If you would
like help, we can do this for you as well!
The other catch is you must pay yourself a “reasonable” salary if you are
active in the business and the business is profitable. The government does not
define what reasonable is so It is up to you. The good news is, because an
Amazon business does not require much labor or time, you can pay yourself
something fairly low and still make a reasonable argument It is a fair wage for
the time and energy you are putting in.
Now, aside from payroll there is one other kind of payment we should discuss
that is related to payroll but not the same.
Paying 1099 Vendors
1099s are issued to individuals or companies in the US that provided you with
services during the course of the year that added up to $600 or more in total
payments. Your own employees and corporations you do business with are
exempt, as are product purchases. Some LLCs are exempt, but most are not.
Law firms are normally not exempt. The rules start to get a little tricky and
change a bit every year on who qualifies.
But you can be well ahead of the game if you make a point of tracking who
you are doing business with, considering if they may qualify for a 1099 and if
so, requesting they provide you with a completed W-9 form.
The best way to get vendors to comply is to hold their payment until they
provide you with the form. Since it only takes about 10 seconds to fill out,
most people will get it for you immediately if it means they get their check.
If someone insists they will not allow you to issue them a 1099, then you have
a decision to make. If you do not issue a 1099 to someone who is eligible, and
still claim the expense (hey- I did pay him!) then you potentially run the risk
of not being allowed to use that expense if your tax return is audited.
Issuing a 1099 is your proof you paid for the service and that the government
should look for income taxes from that person, not you. If you do not issue the
1099, the government can claim the payment never got made (or you wrote a
check but they turned around and cashed it and gave you the cash back), and
therefore you owe income tax on the amount that expense was used to lower
your net profit.
The reason this is an issue is because each year, 1099s are due to be filed by
January 31st. But you will not have final payments made until (maybe) the end
of December. So by the time the books are done for December, you may only
have a week or less to get all your 1099 info together and filed. If your books
are not done, or you do not have your 1099 vendors identified ahead of time, it
may not get done at all.
This is easy to do right from the start and a pain to catch up later. Yet very,
very few of the clients we have were doing this correctly when they were
doing it themselves or even when paying someone else to do it.
Go through your list of active vendors and identify which ones are eligible for
a 1099. If you do not have a W-9 on file for them, ask them for one now –
before you issue them another payment. Mark their account as 1099 eligible in
QB.
Some will take longer to get than others and some might not make it to $600,
but for those who do, your job will be vastly easier and you will be on the right
side of the IRS when you can easily issue 1099s to everyone who gets one
well ahead of the January 31st deadline.
Inventory Count
Inventory Value
If a company purchases raw material and spends more of its funds doing this,
then there will be an increase in the inventory. If the inventory was acquired
using cash, then any increase in the value of the inventory will be deducted
from the net sales of the company. Likewise, any decrease in the inventory will
be added to the net sales. There will be an increase in accounts payable if the
inventory was purchased on credit, and the same will be reflected on the
balance sheet. The amount of increase from one year to the other in inventory
levels will be added to the net sales. The same criteria are used for taxes
payable, prepaid insurance, and any salaries payable. If an expense has been
paid off, then the difference between the value owed from one year and the
next must be subtracted from the net income. If there is an outstanding
amount, then any differences need to be added to the net earnings.
Inventory Buffers
It is extremely important to maximize the capacity in a constrained operation
every time. One of the best ways to do it is by building an inventory buffer in
front of the constraint operation. This inventory buffer will assure that any
shortage of production of any parts of the operation will not hamper the
continuous process or production of the product and it usually fluctuates in
size as it gets used and replenished.
The performance of a company can improve by installing a sprint capacity in
the production areas of the company.
Sprint Capacity
Sprint capacity is an increasingly high amount of production volume that is
amassed in the factories or workspaces. When a mishap happens in the factory,
and it cannot be avoided, the continuous flow of parts is stopped, and that's
when sprint capacity is required. In this phase, the bottleneck takes resources
from inventory buffer, which ends up in shortage in inventory buffer. So extra
sprint capacity is required to mass-produce parts to refill the parts shortage in
inventory buffer so that it can be used in the next unavoidable mishap.
It's a wise decision to invest in a large sprint capacity in a production company
as it can rebuild the inventory buffer is a short span of time. So, if you can
invest in a large sprint capacity, only a small investment is required for
investment buffer. Or else if you invest in large inventory buffer, there will be
less sprint capacity.
One of the main points we can learn here is that it is always a better option to
maintain some space in the capacity in work areas and not limit the production
capacity to the current needs.
Bookkeeping Tips For Small And Medium Business
As a new entrepreneur, you have a lot of financial details that you have to keep
track of to help the business run efficiently. Doing this well has a lot of
advantages. It can help you to make sure that you are making profits and
understand exactly where your money is going each month. It helps you to be
prepared for tax season at the end of the year. And it can ensure that you are
paying your employees properly and that your business is growing the way
that you want.
Getting started with bookkeeping may seem a bit confusing when you first get
started. There are many different forms that you need to pay attention to, and
this can be scary for a lot of beginners who have never experienced these
before. Let’s look at some of the best bookkeeping tips that you can follow to
help your business stay financially secure.
Plan For The Major Expenses
There are times when a big expense is going to come up. If you don’t plan for
these issues, you will either put yourself in trouble with money, miss out on
some big opportunities, or have to go out with something. When you plan for
these major expenses, and they are going to show up at some point, you will
either have to miss out on a business opportunity that is important to you, or
you may have to scramble for a loan from the bank if you have to pay. For
example, if your computer system crashes and you need to pay for some IT to
come in, it is much better to have this money on hand rather than scrambling
to get a loan and get it fixed in time.
There are several things that you can do when this happens. First, put big
events, computer upgrade that is needed, on the calendar a year in advance. If
you can, write this down every year for the next three to five years. You can
also acknowledge on the calendar some of the periodic ups and downs the
business has and make sure that you are putting enough money aside to make
it through these leaner months as well.
Often the costly things that you need to fix are going to show up in the easier
months for your company. Do you really want to get caught in the trap of
taking out money during the busy periods, just to find out that you are short on
money for major repairs in some of the slower months?
Track All The Expenses
You want to keep accurate records of all the expenses and transactions that
come up with your business. Tracking these not only give you a good idea on
how the finances of the business are doing, but it can help you with tax season.
If you don’t keep good track of the expenses that you take on during the year,
you might miss some tax write-offs or have to give up on a few because you
just don’t have the right information.
Having the right bookkeeping methods in place, and keeping all the receipts of
your business along the way, can help you out here. You should either have
everything added and uploaded to your online bookkeeping software or have
another system of accounting that you can work with to help keep everything
organized. This will go a long way in helping you see results.
This means that you should keep track of everything that you do with your
business and every expense that you take for the business. This includes any
events that take cash, any coffee dates, lunches, and business trips, should be
kept track of. This habit is going to go a long way in the direction of
substantiating those items for your tax accounts in case you are audited. These
records make sure that you are safe in case the IRS wants to look at your
records and can make it easier to know what tax deductions you get in the first
place.
Record The Deposits Correctly
The best thing here is to take up a system that will keep all the financial
activities of your business straight, whether it is a notebook that you use on a
regular basis, the help of an Excel spreadsheet, or some software that can
record all your financial information.
Being a business owner, you need to make a wide variety of deposits into your
bank account throughout a fiscal year, including deposits about revenue from
any sales, cash infusions from the personal savings, or loans. The trouble here
is that when the year ends, you (or a bookkeeping you decide to work with),
might go through this information and then record some of the deposits as
income when they aren’t your income. And when this happens, you could end
up paying taxes on more money than what you actually made that year.
Set Money For Your Taxes
If you are past the first year of business, or you are a sole proprietorship who
owed the IRS $1,000 or more for a year, then you need to file quarterly tax
returns. If you fail to do this, then the IRS could levy interest and penalties for
not filing these on time.
The best thing to do is to systematically put some of the money aside during
the year that you can use to pay your taxes. Then, on the calendar, you will
note the deadlines for the taxes, along with any preparation time if it is needed.
This ensures that you are actually able to make the tax payments to the IRS on
time when they are due.
One thing that can be especially problematic for your business is payroll taxes.
There are times when some entrepreneurs, who aren’t taking care of their
finances properly, will be crash-crunched and end up in a down cycle. They
will dip into the employee withholdings, the money that was earmarked to be
sent to the IRS.
If you start messing with these payroll taxes, you are going to end up with a
twofold problem. First, you haven’t paid the taxes that are due for the
employees, and you have taken money that the IRS sees as belonging to the
employees. The IRS is not going to be very happy about this situation, and you
will end up in a lot of trouble. Set aside some money to help you pay your
quarterly taxes.
Keep A Tab On The Invoices That You Have
You will quickly find in your business that any late bills or unpaid bills are
going to cut into the cash flow that you have. When people are not paying the
invoice that they owe to you, and you had to pay for employees to do the work
and materials, this can really end up putting you behind. You had to pay for
everything upfront, and now you have to make due and keep getting things
paid upfront for other customers, without having that money from the original
customers.
You have to always keep track of the invoices that you have to make sure they
are all paid on time.. Then put a process in place so that you can make phone
calls, send out a second invoice, and levying penalties, such as extra fees at a
certain deadline.
When it comes to the invoices that you have, you want to make sure that you
have a plan in the event one of your customers doesn’t pay their bill to you yet,
since this can influence the cash flow so much. Come up with a plan of what
you will need to do if the customer is thirty, sixty, or ninety days late on an
invoice that you sent them.
Don’t fall into the trap of thinking that once you sent out an invoice to a
customer, that your bills are taken care of. Every late payment is basically an
interest-free loan, and it is going to seriously harm the cash flow of your
business. You want to keep sending out invoices and have a good plan in place
to ensure that you are getting the message out to your customer and that they
will pay for the product or service.
Bookeeping Tips For Large Scale Business
Large cooperation different from the small scale business and require
professional accountants to manage their books. The owners cannot take the
risk of keeping records of the day to day transactions of businesses and have to
be handled by professionals.
What do we mean by large scale business or cooperation?
A large scale business encompasses huge transactions, business deals and
coverage rather than a small scale business. They have lots of workers and
departments that keep the business running. It is difficult to actually place a
minimum to classify a large scale business, but in terms of size and the amount
of deals they pull, it is way larger than a small scale business.
The operation of big corporation usually exceeds their locality and their
products or services travel long distance to their clients. The way in which the
bookkeeping of corporations is handled is way different from that of the small
business. Professional accountants will be needed to keep track of all
operations in the organization and to maintain accurate books, payroll and
taxes information.
In some cases, the company will outsource its accounting department to an
accounting firm that will handle all the bookkeeping and account details of the
company. The work involved here can be massive and can require a team of
accountants lead by a team leader.
They will be sure to provide a financial statement to the owners or board of
directors that oversees the care and running of the business. There are some
similar things you will find with bookkeeping for a small scale businesses that
you will also find in large scale corporations.
Here are some tips that are required for the running of the books in big
company:
Getting a Team of Professional Accountants
There is no point in leaving the bookkeeping jobs for the owners to run. In
such cases, professional accountants are required. The operation of a big
corporation is much more complex than can be handled by small business. The
professionals are well trained to handle situations that will occur in such large
bases of operation. They are great at applying the best methods of
bookkeeping available - the Accrual method and double bookkeeping method.
You do not necessarily have to go out looking for accountants to manage your
books as you can outsource the job to an accounting firm. The accounting firm
will take over the accounting department and ensure that your books are
always kept up to date.
Accounting is very important in a business and you need the right firm with a
good track record to ensure you get error free and efficient accounting. Some
businesses have folded up because of improper accounting, which was caused
by the inability of the accounting department to accurately manage a business.
In searching for an accounting firm, you should consider the following:
Ask around for credible accounting firms who deal within the same industry.
Search the history of the company to ensure that they do not have a bad record
or criminal history.
Check for previous clients and the reviews they have given about the
organization. If the firm is good at what they do, they will be happy to share
references.
When you are working with a group of accountants, ensure not to mingle in
their business. Give them room to operate and do their work at all times.
Always Check on the Accountant
You are running a big corporation and as the partner of your corporation and
business affairs, it is important to get regular updates by checking on what
they are doing. Ask for reports and demand that they provide financial
statements at timely intervals.
Also, supervising the accountants will keep them on their toes to meet up with
the deadline. If you leave them unsupervised or without deadline for tasks,
they may lack the urgency and care for the work that you need them to do. One
way to check on your accountant is to run an audit on the department with
another accounting firm to ensure that they are not working against the best
interests of the company.
Auditing is essential in big business and it is best done when you do not
inform the accountants that it is going to be carried out. In all you do, you
cannot cross check the work of your accountants by yourself, so you have to
spend money to get your accountants checked out. Auditing is an important
aspect of large business bookkeeping and accounting and goes beyond the
scope of this book. Just keep it in mind as your business grows.
Open Accounts for all Forms of Transactions
When it comes to big business, you have a business account for your business
with more than one signatory to the account. In running the day to day
business, the accountant will be responsible for dealing with the accounting so
they will be working along with the accounts department. If possible, the
accountant will be part of the signatory to the account so they will be aware of
the movement of funds and will be able to keep track of the transactions that
occur in the business accounts.
If, on the occasion, the businesses have branches, then the area head
accountant will have to submit financial statements from their sectors, which
will be reconciled and one financial statement to be produced for the final
financial statement of the business.
So, in this instance, all the individual branches must work together in
reconciling accounts for the business to get the actual financial status of the
business. There is an accounting team in the headquarters, usually that all the
branches report to, and they end up making the final financial statement for the
company. So the process of bookkeeping and accounting is a very complex
process that requires much time and that is why it is important that the
branches keep an accurate account so it will be easy to merge them and
provide accurate results.
Make Use of Accounting Software
When you are dealing with the account of a big corporation, you will be
dealing with huge loads of work. Most times doing this manually will not be
possible, filled with errors and time consuming. Some accounting firms have
their programmers that help them develop software that is suited for a
particular company to meet their needs.
This software will help accountants to manage their bookkeeping, present
financial statements, presentation and calculation of data. Many have training
videos and written tutorials available on the platform that will show you how
to use them or your firm can provide an in house tutorials for you. It is
important to get your team working on the latest software available so they
will be efficient in their work.
Companies should also allow their accountants to go for refresher courses that
will show them ways to use the latest accounting software and methods.
Request Quarterly and Financial Statements
As the owners of the business, the best way to check on your business is to
require quarterly statements and end of year financial statements. The financial
decision of the business will be based on these statements that are given to the
business owners to analyze and digest.
Also by making this request, the business owners are ensuring that the
accountants are on their toes working hard to ensure proper accounting of the
business and timely presentation of the reports requested.
Ensure the Use of the Latest Accounting Software
You have to keep up to date with the latest technology to keep your accounting
safe, easy and efficient. There are regular updates of the software you are
using, which will improve their capabilities and keep them safe from the latest
malware. Malware can be a security threat and may damage your files, so stay
secure and keep your software updated at all times. Most offices are now
connected to the Internet and security is paramount to keeping company data
safe. Hackers can creep into your network, steal company information or cause
havoc that will affect the business.
And don’t forget to backup! Daily, automatic backups are the easiest.
Whatever you decide, be sure you are always backing up your info, even if it’s
just to the Cloud.
Keep Track of your Liabilities
You should keep track of your liabilities to ensure that they do not impact
negatively on your business. Liability is anything that takes money away from
your business and can become harmful when they exceed the assets of the
company, and can indicate that the business is heading toward bankruptcy.
There is some liability that is necessary for the business, but as a company you
should always check your liabilities and make sure they remain at a
manageable level.
Why You Need The Knowledge Of Accounting
Do you really need bookkeeping in order to have a business?
The above question has been debated for a long time as people tend to analyze
the importance of acquiring this knowledge regardless of which kind of
business you have. Small business owners often end up learning bookkeeping
as they carry out their basic daily tasks.
However, you still need to expand your knowledge with the available online
and offline courses that will sharpen their knowledge. It is understandable for
small business owners to learn some level of basic bookkeeping and
accounting, but what about those who employ people to do these bookkeeping
and accounting jobs for them?
Know How To Run Your Business
For the person that runs a personal business, knowledge of bookkeeping will
help the person managing the business accounts. The basics may be needed to
run a small-scale business, but one can go for advanced courses as the person
seeks to know how to manage their business.
This book has provided you with the basic knowledge of bookkeeping and
accounting and we have shown you how to make a simple accounting of your
business. If you have accountants working for you then you’ll be able provide
them the proper documents needed for them to prepare and analyze your
information, and in exchange, help to provide you accurate guidance.
It would be a mistake to leave yourself completely at the mercy of your
accountant with no knowledge of your business’s accounting rules. Do not
make the mistake of being disinterested in bookkeeping and accounting, for
this is where the money is calculated. It is your business and you are in charge,
so you should know how the financial process of the business is going. Stay up
to date with the bookkeeping as you check on the books and accounts of the
company.
When the accountants are aware that you are knowledgeable about the
accounts, they careful not to make mistakes and often enjoy working with a
business owner that is knowledgeable and can talk “shop” with them. They
will be less likely to attempt to cheat you, for they know you are aware of their
activity in the business and how it works. When an accountant, bookkeeper or
any financial advisor knows that you have no clue about your business, then
you open yourself up to be taken advantage of.
Analyze Financial Reports
What will you do if your employee drops the monthly financial report on your
desk? Do you have the knowledge to understand and know what it tells you
about your business?
This is one of the important reasons for getting yourself equipped and learn to
analyze the data. You can picture how your business is faring by looking at the
data in front of you, which is important in making decisions.
What does your account sheet tell you when your expenses are higher than
your income? You are experiencing losses as your sales and inventory does not
tally, so what do you do?
In this first instant, when your expenses are more than what you make,
obviously you have to cut down on what you are spending. Look out for what
expenses can be reduced and in such cases that will not affect the outcome of
the business. Such a decision will require some knowledge of accounting.
Now, in the second scenario, your books do not tally with what you make and
your inventory. This is the time for you to take a look at the account sheets and
find out what went wrong. It may be that you are experiencing a loss because
your inventory is being tampered with, maybe by employee theft, for instance.
They may be stealing from under your nose, since they know that you do not
know how to take inventory. When you can take inventory, you can trace
where this shortage in your inventory is coming from and then you may be
able to trace exactly which employee is taking advantage of you. If your
workers know you’re on top of your business, they are less likely to steal.
Decision Making In The Boardroom
Your ability to make financial decision for your business, either in a personal
business or in the boardroom, depends on your ability to make decisions based
on what is placed in front of you. Take a look at the financial statements in
front of you and make informed decisions rather than guess work. Even you
are unsure, you will have enough knowledge to approach others for assistance
and to collaborate.
Most board members are knowledgeable in reading financial reports and
analyzing reports in order to make sound decisions. Remember, you don’t have
to be the novice at the table. You can learn and take control of your financial
understanding.
Don’t Get Cheated
Knowledge of accounting will be useful so you do not get cheated, either in
your personal business or when making financial decisions. Imagine yourself
as an investor who is seeking an opportunity to invest in a business. With the
knowledge of bookkeeping and accounting, you can make favorable decisions.
You will look at the report and be able to determine the health status of the
business, as it will be a visible information rather than relying on what you are
being told.
On the other hand, you are an important member of the company board and the
accountant cooked up a phony statement. With your knowledge, you’ll be able
to scan through the papers and point out the red flags while you determine
where the discrepancies are in the report.
As a business owner, you can determine your taxes and pay them on time and
you can determine when a consultant is trying to play tricks on you.
Do not take the knowledge of accounting for granted in your business! Do not
say that the aspect of accounting should be left solely in the hands of
professional; get involved in your business. Your future depends on it.
Specialize In Specific Areas In Bookkeeping And Accounting
Now the world of bookkeeping and accounting is very broad and in your quest
to learn, you might decide to specialize in some particular aspect. In the
process, you might decide that you want to focus more on the investment part
of accounting, or on bookkeeping or other areas and in the process become an
expert in that field. There are people that are very good in the management of
company data, in preparing taxes for companies, in reading financial reports
and carrying out the necessary deductions using your own knowledge rather
than relying upon others.
As you learn more about the accounting process, you may find a particular
area you are interested in and decide to work in that area of specialization. You
can become so knowledgeable that you are paid as a consultant to help others
in that particular area of accounting.
As a board member, you might be interested in investment in other companies,
so you take much effort to analyze the financial statements of companies to
pick up the investment indices of the reports. You will work with those
indices, such as income flow, balance sheets and sustainability of capital, as
well as learning how well the company can make a profit. With these, you can
easily analyze the business fortune of a company. As you become interested,
take the time to study these indices as it becomes easier for you to pick up the
right details as you can easily deduct the investment profitability of the
company.
Others may be interested in other areas such as managing the expansion of a
company, tax preparation of the company, inventory and other areas of
bookkeeping and accounting.
Bookkeeping Increases Your Knowledge Of Business
As you learn bookkeeping, you become very knowledgeable in business
structure because you are aware of every aspect of the business, be it the
inventory, salary structure, money management etc., and this makes you a very
important asset to your business and in business decision making. So, in
essence, you can see that bookkeeping and accounting are no waste of time
and everyone should at have a basic understanding of accounting. If you want
to succeed to business, reduce spending and increase profit, you must know
and understand you finances.
You Are In Command Of Your Business
With no knowledge of the simplest form of bookkeeping, you are left at the
mercy of your accountant or employee (or friend or neighbor for that matter)
to make your business decisions for you. When you are in this situation, you
are left riding in the back putting others at the wheel, because you lack the
ability to understand the basic decision making indices. You end up having to
pay people to help you make decisions and you may not be aware of what is
going on in the business. It is a set up for failure.
However, with basic knowledge of bookkeeping and accounting, you can
partake in the decision making within your business. Because you know what
you want for your business, you can make decisions that will suit you with the
ability to read and understand the information from the financial sheets. In
learning the basic knowledge of accounting, you may not be directly involved
in the accounting process, but you will have the ability to read the information
provided and be decisive.
Do not allow anybody to be the game changer in your business because you do
not understand basic bookkeeping. Move into the driver’s seat and take charge
of your money, your decisions, your business and your life.
Conclusion
A closing process in accounting refers to the steps an accountant must take to
review and zero out some accounts, like the income and expenses accounts,
and then record the net profit or loss in the balance sheet. If you use
accounting software to prepare your books, it will close your revenue and
expense accounts automatically.
Most times, the closing process is always carried out by an accountant.
However, a small business owner can use accounting software to accomplish
this task. Your books need to be closed annually since you need to file income
tax returns every year. It is a common practice among businesses to close their
books monthly.
If you perform many transactions and your business is large, you might need
to leave the closing process to your accountant. As a business owner, you
should understand the process of closing the books, even if you are not doing
it yourself. This will help you to know if your job was well done.
Closing your books for the year-end means that all your reports have been
finalized. These reports reveal the financial performance of a business during
an accounting period. Business owners are entitled to know the ups and downs
of their business.
Closing entries are aspects of the accounting process that occur at the end of
an accounting period. During the closing process, balances in temporary
accounts are posted to permanent ones. These temporary accounts include
dividends, income, and expense accounts.
There are different reasons you need to close your books. The main purpose of
closing the books is to ensure that revenue generated and expenses incurred
from a previous accounting year are not carried over to the current account
year. The closing process also helps business owners have insight into the
financial position of their business.
Small business owners should ensure that their books are closed at the end of
the year to file income tax returns annually. When you close your books, you
can easily detect any error in your bookkeeping and accounting system.
Closing the books also help businesses prepare for the next accounting period.
When you close your books monthly, it makes it easier to carry out monthly
tasks such as paying your suppliers, sending invoices to customers, reconciling
bank statements, preparing the journal, and sending reports on sales tax to the
state. The closing process also helps you create an outline and strategies for
the next accounting period.
Chapter 32. Introduction to Quickbooks
QuickBooks is a business software for the financial responsibilities your
company has. You can do bookkeeping and accounting with QuickBooks
software. Some businesses use the software only for paying their
employees, while others use the full repertoire available.
QuickBooks is designed mostly for the small business retailer, contractor,
manufacturer or distributor. It is also helpful for attorneys, non-profits and
CPAs. The businesses that get the most use out of QuickBooks have under
50 employees, with less than $20 million in revenue.
In 1494, Luca Pacioli invented a double-entry bookkeeping concept, which
became known throughout the world. Pacioli was not the first to have
bookkeeping and accounting practices. However, he was the first to
describe the debits and credits concept. Pacioli used debits and credits in
journals and ledgers, which we still have today. By 1887, accounting
became a profession with the first CPAs licensed in 1896. Large firms
started adding accountants on retainer, having accountants audit the books
for performance and other reasons. Eventually, we hit a point where
technology became useful beyond what Pacioli and early accountants could
have imagined.
QuickBooks is part of Intuit’s software line, founded in 1983 by Scott Cook
and Tom Proulx. The first program they created was called Quicken.
Quicken is still around today. While some functions are similar to
QuickBooks, it is also meant for larger businesses. In 1992, they launched
QuickBooks, which has become the most popular accounting software a
small company can have. At the outset, QuickBooks had some limiting
factors in what it could do and was unable to work with complex
businesses. Many small businesses found tracking vendors, writing checks,
paying employees and keeping up with accounts payable and receivable
was doable with the software package. In 2001, QuickBooks gained new
updates that made it worthwhile and, in 2015, it became the most used
accounting software for small businesses.
QuickBooks has evolved from the 1992 version. At first, you had to buy the
program and install it on your computer. It came in a box, with a manual
and a disc. It is available in this way today, although the manual is now
online. In the new millennium, QuickBooks, like many software companies,
started offering the program via download from their website. It has
evolved even further to be a program you access without downloading to
your computer. The plans and pricings discussed later explain the CD-ROM
option, download from the net, and online usage.
Intuit never stops trying to improve their accounting software. They offer
continual updates and add new features that their clients will find useful.
Basic Fundamentals Principles Of Accounting
The full form of GAAP is Generally Accepted Accounting Principles. A
common compilation of agreed accounting principles, methods, and
standards that industry and their employees must obey while submitting the
financial statements are referred to as generally accepted accounting
principles.
Many companies mainly use GAAP for the following purposes:
Organize all the financial information to accounting
records.
Collecting the accounting records and making a financial
statement.
Providing few supporting documents.
GAAP usually requires the company to maintain a minimum level of
consistency in their financial statements, mainly for the investors to make
their work of analyzing and getting useful information about the company
easier and faster. GAAP also helps to compare the financial statements of
different companies.
The following are the main aim of GAAP:
1. Principle of regularity
As GAAP rules and regulations are set as a standard, the accountant has to
stick to it.
2. Principle of consistency
Accountants have to be consistent and apply the same rules and regulations
in the entire process to avoid mistakes and discrepancies. The accountants
have to mention and explain everything, and even if there's a minute
change, they have to reason it out.
3. Principle of sincerity
The accountant tries her/his best to represent an exact condition of a
company's financial condition.
4. Principle of the permanence of methods
The methods and techniques used in financial reporting have to be followed
consistently.
5. Principle of non-compensation
Not only the positives but also the negatives have to be mentioned with
clear details and without any expectations of debt compensation.
6. Principle of prudence
Focusing mainly on financial data representation with clear facts.
7. Principle of continuity
It should be assumed that the company is still running while calculating
financial values.
8. Principle of periodicity
Everything entered should be classified into their relevant timelines.
9. Principle of materiality
The accountants should mention every minute detail in financial reports.
10.
Principle of utmost good faith
It says everyone involved must maintain transactions genuinely.
GAAP includes the following:
Financial statement presentation
Properties
Liabilities
Equity
Revenue
Expenditures
Business combination
Derivatives and hedging
Fair value
Foreign currency
Leases
Nonmonetary transactions
Subsequent events
Industry-specific accounting like airlines, healthcare, and
other activities.
These industries specified accounting in GAAP might be different in
transactions than the others.
GAAP vs. IFRS
GAAP is mainly followed in the United States of American companies and
is set by the financial accounting standards board (FASB). In other parts of
the world, instead of GAAP, International Financial Reporting Standards
(IFRS) are used and are issued by the international accounting standards
board (IASB).
Since 2002, both the IASB and FASB have been working hard to merge
GAAP and IFRS. As a result of this hard work, in 2007, the SEC had
removed the requirement of a non-US company in the USA to comply with
their financial statements with GAAP if it is already reconciled with IFRS.
Before this, a non-US company in the USA had to comply with their
financial documents with GAAP for trading in US transactions.
So, following are the differences between GAAP and IFRS accounting:
Locally vs. Globally
As mentioned, IFRS accounting is used in more than 110 countries and is
globally accepted whereas GAAP is used only in America and has its own
rules and regulations making it more difficult for American companies to
do business outside.
Rules vs. Principles
One of the main differences between GAAP and IFRS accounting is the
technique used in the accounting process. GAAP is strictly based on rules,
and IFRS is more about overall patterns and is based on principle. As
GAAP sticks on rules, everything is mostly clear so interpretation and
exceptions are uncommon whereas in IFRS, even though accounts are the
same, as it's based on principle, there can be different interpretations.
Inventory methods
In the GAAP method, they permit the Last In, First Out (LIFO) method for
inventory estimates, whereas, in IFRS, a LIFO method is not allowed. LIFO
method cannot be reliable as it's not accurate with inventory flow.
Inventory reversal
Not only do they have different tracking inventory methods. GAAP and
IFRS accounting have a different policy in inventory write-down reversal.
Whenever there's an increase on the market value of an asset, GAAP
doesn't allow in reversing the inventory write-down, which reflects that
GAAP is very careful with inventory reversal and doesn't implicate the
changes on the market, whereas in IFRS the company can reverse the
inventory write-down.
Developmental costs
The developmental cost of a company can be counted as an investment as
long as they meet certain requirements on the company in IFRS. But in
GAAP, the developmental cost would be considered as expenditure the
same year and not as an investment.
Intangible assets
Research and development or advertising costs come under intangible
assets. So, in IFRS, since they are principle-based accounting, they are very
considerate about intangible assets and see if the assets can be beneficial in
the future to the company. But GAAP considers intangible assets to be fair
market value and nothing beyond.
Income statements
In GAAP, unusual or extraordinary items are segregated and mentioned
below the net income portion of the income statement whereas in IFRS;
these are not separated and included in the income statement.
Classification of liabilities
In GAAP, the debts of the company are separated into two sections. One is
the current liability in which the company will be able to pay a certain
amount at a certain period of time, and the other is the noncurrent liability
where the company cannot pay the amount in that period of time. In IFRS,
they don't have any differentiation, and all debts are put in one balance
sheet.
Fixed assets
Fixed assets are the properties, furniture, and equipment of a company. So,
in GAAP accounting, they value the assets using the cost of the model
when bought minus the damage, repairing, and maintenance is done till
date. Whereas in IFRS, they consider the cost of the asset by checking the
cost in current time minus the damage, repairing, and maintenance done till
date and is called the revaluation model.
Quality characteristics
Out of all, this is one of the main differences between GAAP and IFRS.
GAAP functions on the hierarchy of characteristics like relevance,
reliability, comparability, and understandability, to make the correct
decision based on user-specific circumstances. IFRS also works similarly
just for the fact that it doesn't decide based on user-specific circumstances
of an individual.
Accounting Principles
In the field of accounting, there are some basic rules and guidelines that
govern it, and these general rules are known as basic accounting principles
and guidelines. Some of the detailed complicated, and legalistic accounting
rules and guidelines are completely based on these accounting principles.
The basic accounting principles and guidelines are also used by the
financial accounting standards board (FASB) to set their own detailed and
comprehensive set of accounting rules and standards.
Generally accepted accounting principles (GAAP) is comprised of three
important rules, and they are:
The basic accounting principles and guidelines.
Rules and standards that are set by the financial accounting
standard board and accounting principle board (apt).
Commonly accepted industry practices.
When a company is making its financial statements public, while preparing
those financial statements, the company is supposed to follow the generally
accepted accounting principles. Also, when a company's stock trading is
done publicly, the federal law has to audit the company's financial
statements using independent public accountants. It has to be proven by
both the companies' accountants and the independent public accounts that
the company's financial statements and the related notes on the statement
were made following the generally accepted accounting principles (GAAP).
It is proven that generally accepted accounting principles are very
beneficial as it standardizes and regulates accounting definition,
assumptions, and procedures. We can make sure that a company's method
of preparing its financial statement is consistent throughout the year using
generally accepted accounting principles. Even though there might be some
exceptions, it can be said assuredly while differentiating companies or the
company's financial statistics to the statistics of the industry. Since the
financial transactions have become very complex, accordingly generally
accepted accounting principles have become complex.
What Are Accounting Principles?
The term “accounting principles” might sound odd - and downright scary to someone who isn’t involved in accounting in any way. However, things
are much simpler when you look in-depth and understand that accounting
principles have been adopted not because someone wanted to terrify young
entrepreneurs and beginner accountants, but because they were needed.
In this chapter, we will go through the basic definition of accounting
principles, how they came to be, why they are needed, and the two main
groups of accounting principles: generally accepted accounting principles
(or GAAP) and the alternative accounting principles (a set of accounting
principles less common, but which might prove useful under specific
circumstances as you read through this book).
Without further ado, let’s dive in!
The Definition of Accounting Principles
The simplest way to define accounting principles is by calling them a “set
of rules created to govern the entire field of accounting”. In everyday terms,
accounting principles are the very foundation upon which the more
complex (and potentially more intriguing and interesting) regulations
created around accounting are built.
Mind you, accounting principles have not always been the same - they were
created along the way, as professionals in the field and regulators
discovered the need for such rules to be implemented.
In the United States of America today, generally accepted accounting
principles (GAAP) are strictly followed by everyone. Even more, if you
want your company to be part of the stock exchange, you need to follow
these basic rules to a T.
It is important to note that accounting principles are not the same all around
the world and that sometimes, the difference between the regulations of one
country and another might be staggering. In most developed markets, the
principles stay more or less the same, with certain adjustments made to fit
the economic and political landscape of those specific countries. In
developing markets, however, things might be severely different - and this
is why it is crucial that you hire the services of a local accounting expert if
you want to expand your business to any other country on Earth.
The institution that deals with creating a uniform set of rules to govern
accounting at a global level is called IASB (International Accounting
Standards Board), but at the moment, there is no universally accepted set of
accounting principles the entire (or at least the vast majority) world abides
by.
Coming back home to the US, accounting principles here consist of three
main pillars: the basic accounting principles and guidelines (the rules
themselves), generally accepted industry practices (how the rules are and
should be applied in “real life”), and the detailed rules issued by the FASB
(Financial Accounting Standards Board) and by the Accounting Principles
Board (APB).
As mentioned in the beginning, accounting principles have not been created
and adopted to torment anyone trying to enter into this field of expertise,
but rather with the purpose of helping them. In short, accounting principles
help accountants and business owners achieve the following:
Is useful to potential creditors, as well as potential
investors, so that they have the full picture of what your
business’ books look like, both from an investment point
of view and from that of the cash receipts and economic
resources;
As a resource to those who run the company to help them
make sane financial decisions - short term and long-term
alike;
Is used by those who run the company to help them
improve the way the business is performing;
Useful in maintaining clean, clear, and coherent records of
the company’s financial state.
Generally Accepted Accounting Principles
If we look at accounting as a house, and consider accounting principles as
its foundation, then the generally accepted accounting principles are pillars
upon which the foundation is poured.
While not the only principles accountants abide by, GAAP are the
principles everyone should follow - especially if the company is public and
its financial records have to be available for potential investors, creditors,
and shareholders.
Generally accepted accounting principles are based on the following goals:
1. The accountant has taken GAAP as the standard.
2. The same standards are to be applied throughout the entire
reporting process so that any kind of errors and
discrepancies are avoided.
3. If any standards are changed or updated, the accountant is
expected to disclose and explain the reasoning behind the
decision.
4. The accountant must be sincere in the depiction of the
business’ financial situation.
5. All the procedures used in financial reporting have to be
consistent in time.
6. The accountant (and company) will not expect debt
compensation despite showing both positives and
negatives in their reports.
7. Speculation should be eliminated and financial data
reporting should be fact-based.
8. All the report entries will be distributed across the right
time periods (e.g. revenue is to be divided by its relevant
time periods).
9. Full disclosure should be a goal of all financial reports.
10.
When reporting, the assumption is that the business will continue
to operate.
11.
The parties involved in transactions should remain honest.
In order to achieve the aforementioned goals, generally accepted accounting
principles have been split into twelve concepts: basic assumptions (four of
them), basic principles (four of them) and basic constraints (five of them).
They come as follows:
1. Basic assumptions: Business Entity, Going Concern,
Monetary Unit, and Periodicity;
2. Basic Principles: Historical Cost, Revenue Recognition,
Matching Principle, Full Disclosure Principle;
3. Basic Constraints: Objectivity, Materiality, Consistency,
Conservatism, and Cost.
The Alternative Accounting Principles
While we do not aim to go in-depth with these, it is important to be aware
of their existence and of the fact that they are practiced as a complement to
generally accepted accounting principles.
Most large companies simply abide by generally accepted accounting
principles, as they are the most widely used and best understood rules in the
financial community. However, in some cases, generally accepted
accounting principles may be too broad or they simply may be incompatible
with how some businesses function. For instance, a small business will find
it difficult to follow the same guidelines as a large business, and additional
accounting principles may be used.
These complementary or additional principles are sometimes referred to as
alternative accounting principles.
Why Are Accounting Principles Needed?
To someone working outside of the accounting and entrepreneurship field,
accounting principles are but a set of regulations on paper.
To those who have already gained a little experience in accounting, these
principles are the guidelines to doing good work - work that is consistent,
work that is congruent, work that is relevant, and work that is honest both to
internal stakeholders and to external investors and creditors.
The accounting principles are needed for one simple reason: there has to be
a set of rules that govern how accounting is done across different industries,
types of businesses and business purposes.
To help you understand the importance of accounting principles, think of
them as the rules by which all drivers and pedestrians move around on the
streets. Can you imagine a world without any kind of rules in place?
Probably not.
It would be complete chaos - and there are places in the world where traffic
gets close to just that - complete anarchy. Picture this: everyone crosses the
street wherever they want, however they want to, cars do not give each
other priority when they should and they don’t give pedestrians priority on
crosswalks either.
Driving laws are more or less the same all around the world - with some
exceptions, which are well-known and aggressively announced from the
moment you step into those specific countries (e.g. the UK drives on the left
side of the road, but this is a very well-known fact and it is announced on
big banners everywhere, as soon as you enter the country regardless of the
means by which you do that).
In accounting and financial reporting, there are no set international
standards - but there are country-specific laws and regulations meant to
make the reporting uniform and easily understandable by everyone.
Not having accounting principles in place means not having a basic
understanding of how the traffic of financial reporting works. It means
navigating aimlessly, on your own terms - but even worse, it could mean
every business has the option of being unjust and dishonest with their
reporting. How would investors know which business is worthy of their
attention, then? How would stock markets themselves be able to assess the
value of a share?
At this point, you may wonder and ask: Yes, but generally accepted
accounting principles haven’t always been around.
Indeed, they haven’t. In fact, the group of standards and regulations we now
call GAAP has been set for little over a decade. They did exist before that
as well - but they consisted of exhaustive rules that allowed for plenty of
error (intentional or not), and they constantly needed to be updated as soon
as a new situation arose. Until 2002, when this problem was brought
forward by multiple institutions (including the US Congress), accounting
was ruled by fixed regulations, rather than principles.
The first accounting rules were set by the American Institute of Certified
Public Accountants in 1939 through the Committee on Accounting
Procedures, and they were subjected to the regulations of the US Securities
and Exchange Commission. Later on, in 1959, the Committee on
Accounting Procedures were replaced by the Accounting Principles Board,
and in 1973, this became the Financial Accounting Standards Board. To
date, they are the ones overseeing generally accepted accounting principles.
They were not always seen in a good light by both investors and the
accounting community, though, not because their rules were too strict, but
for the exact opposite. Until 2002, FASB oversaw a set of rules that were
too ambiguous in terms of what should and shouldn’t be done. This allowed
accountants and audit professionals to find ways to circumvent them and to
create new situations that were not stipulated in the set of rules the FASB
enforced.
The entire situation generated a lot of turmoil in the financial world. In
2002, several famous cases brought the FASB system to the attention of the
public and the US Congress. In the wake of several huge scandals (such as
the one where Enron and the Arthur Andersen Firm were the main actors),
equity holders in the US realized one very dangerous fact - they could not
trust audit firms, and this needed to change.
We will not dive deeper into the Enron scandal, but the point we’re trying to
make is that it was one of the first moments that pushed for the creation of
generally accepted accounting principles as they are known today. The
loopholes and weaknesses of the previous system were aggressively
exploited by Enron's auditors to mask the tremendous amount of debt the
company was in. It was high time that this drove a change for a principlebased accounting standard.
And it did. While far from perfect (and still debated), generally accepted
accounting principles are, thus far, a better and more comprehensive way of
standardizing the industry’s guidelines.
Generally accepted accounting principles are needed, and they should be
followed. While some of them might be connected to actual US legislation,
most of them are authoritative best practices (at their best). However, as the
vast majority of companies abide by these rules (or, to be more precise,
principles); it is important to do the same because it creates a sense of
trustworthiness and coherence between businesses, creditors, and investors
alike.
As mentioned before, some businesses don’t take generally accepted
accounting principles as they are. But we will dwell on this later on in the
book when discussing alternative accounting principles.
As for the progress on delivering an international set of principles for
accountants, it is still slow and steady - but with globalization becoming
increasingly real and with trades being made across borders every day, this
international set of principles is getting closer by the minute.
At the moment, the main hinge in the development of an internationallyaccepted set of principles lies in, well, methodology. The International
Financial Reporting Standards (IFRS) are more of a set of principles,
whereas GAAP are a set of rules. The first ones make it easier for
accountants to mold business reporting on the given set of principles but
allow for misinterpretation and intentional mistakes. The latter ones,
however, are strict and, at times, they make it difficult for businesses to
mold financials to suit their needs.
As a note, this book is not meant to debate the efficiency of accounting
principles, or their nature. It is an exhibition of what they are, why they are
needed, and how they work in real life. Hopefully, the information
presented below will help you understand why accounting works the way it
does and why a set of principles to abide by is actually necessary in the
context of businesses interacting with each other every day.
Essential Formulas Of Accounting You Must Know
Going back to the days of mathematics back in high school, it was a top
priority to memorize lots of formulas related to accounting to come out on
top in your exams.
It might surprise you that as an adult, you have been able to use those same
formulas in real-life scenarios. The majority of them, though can’t be
practically used outside mathematics (the rest can be remaining ones can be
implemented using various software related to accounting).
Though the essential formulas for accounting are both instinctive and
practical, this makes them easy to recall and implement in the business.
Should a case arise where you forget one of them, you can always recall
them by revisiting this article to refresh your memory and save yourself the
stress of forcibly trying to memorize.
These 6 important formulas for accounting are as follows:
Balance Sheet Equation
It is also called the basic equation for accounting. The equations balance
sheet explains accurately the way the balance sheet gets balanced. The
equation is as follows:
In other terms:
What you have (assets) = what you are owing (liabilities) + your addition or
included business gain (equity)
This is one of many accounting formulas, the moment you understand it;
you can use it to view the healthy state of your business.
For example, your assets (electronics, computers, automobiles) plus your
total account balance, the total sum of your account receive in total is
$15,000, this portion of the balance sheet belongs to the assets or the whole
portion at the top.
Assuming your liabilities have a total of $5,000, this will be the overall
debts you’re owing-credit lines, payable accounts, credit cards, etc.
It entails that the equity-the total combination of your addition and your
gain that hasn’t been collected from the business in the way of allocation
and draws-will be $10,000.
A round of applause, this means that you have a profitable business going,
believing that you are adding a considerably large quantity of resources to
your business to keep it steady.
The Acid test ratio or the Current ratio
It is another very important formula for accounting that tells you how you
can pay off your debts that are short term. The equation is as follows:
From the above example, assuming $15,000 is the entire asset, and the
current asset is $8,000. The current asset has to do with cash or a cash
equivalent, most investments that are short-term and receivable accounts.
Imagine having a liability of $5,000 and $2,000 is the current liability. The
current liability is a form of debt that is due in 12 months.
The credit card balances, short-term credit lines, and payable accounts are
examples of current liabilities.
Using the given equation listed above, our current ratio is 4 ($8,000 /
$2,000 = 4). It means you have four times of your current assets and current
liabilities or clear your short-term debts before your cash runs out. The
short-term debt should be paid 4 times.
Normally, the current ratio should consistently be higher than 1.
Though a very high current ratio indicates capital mismanagement, this can
cause the progress of your business to decline.
Net Earning
Net earnings have to do with the calculation of profitability in a business.
The equation is as follows:
This formula for accounting tells you when you have higher expenses
related to your revenue.
It is essential to understand that net earnings don't mean equivalent money
to the bank.
The liabilities payment and debts that are on the balance sheet are not part
of the net earnings equation.
The addition to capital, assets obtainment, distributions, and draws are not
included as well.
The net earnings equation goes further to display the profitability of your
business operations but doesn't display the wellness of your cash influx.
Creating an account statement can be done easily with QuickBooks.
Price of goods sold
The price of goods sold is another one of the many important formulas for
accounting. Most selling points and accounting systems calculate the price
of the goods you purchase. Nevertheless, there is always a necessity to
carry out calculations manually.
The equation for the price of goods sold is as follows:
For example, you have a lumber yard. At the starting of the month, you had
10,000 (2 × 4's) in your lumber yard. Each of them costs $2.
It means you are beginning the month with a $20,000 estimate of 2 × 4's in
your lumber yard. As the month advances, you decide to buy an additional
$5,000 2 × 4's at an estimate of $2 each, that's a $10,000 value of 2 × 4's.
By month-end, you count your total 2 × 4's, and you have 8,000 remaining.
Due to an unchanged, fixed price of the 2 × 4, you'll have a $16,000 value
of 2 × 4's. Inserting these figures into the equation, you can determine the
price of goods sold:
$20,000 + $10,000 - $16,000 = $14,000
Thus, the price of goods sold for the month is $14,000
The price of goods sold and the total number of sales can be used to
calculate the gross profit.
The gross profit & margin
This is another vital concept that adds to our list of essential formulas for
accounting.
The gross profit is the differentiation between your total sales earnings and
the price of goods sold:
For instance, you sold a total of $21,000 value of 2 x 4's the previous
month. Since the price of goods sold is already known, it will be easy to
calculate your gross profit:
$21,000 - $14,000 = $7,000
Therefore, the gross profit of the previous month is $7,000.
You can now determine the gross profit margin:
Gross profit / Sales = Gross profit margin
Or:
$7,000 / $21,000 = 0.33
The gross profit margin is 33%
Anything you do to increase your gross profit also increases your gross
margin as well. The increase in your gross margin has a strong influence
over your net earnings.
An increase in the gross profit margin by decreasing your price of sale
makes it easy to yield profitability in your business without a rise in sales.
For instance, your price of goods sold the previous month is $13,000 rather
than $14,000. That will give you a gross profit of $8,000, and a gross profit
margin of $21,000 sales is 38% rather than 33% and it wasn't necessary for
you to sell extra 2 × 4's to achieve this.
Break equal points
The formula devises a means of telling you the number of products or
services you need to put on sale to oversee the cost of operation. This
equation takes a bit of time to calculate, but it is the most vital formulas in
accounting that is essential for your business. This is how your break-even
point is calculated:
The fixed cost is your normal expenses that keep recurring and are easily
predicted. For example, your rent, your utility bills, are examples of fixed
costs.
The sales price per unit is the price you sell your products and services.
The variable cost per unit is essentially your price of goods sold. Though
not the precise definition, making use of your price of goods sold will help
you get a clear understanding of variable cost per unit.
Using the example of the lumberyard, for instance, rent, utility bills, and the
other operational costs amount to $6,000 per month. Selling each board of
your 2 × 4's at $3 each and recognizing your price of goods sold as $2 per
unit. You will have this as your breaking point:
$6,000 / ($3 - $2) = 6,000 units
To have a break-even for the month, you have to sell up to $6,000 2 × 4's
The break-even points can also be calculated in dollars:
Sales price per unit × Break-even points in dollars
Or
$3 × $6,000 = $18,000
A sale of $18,000 is required to reach break-even at the end of the month.
Why is it necessary to know your break-even point? Break-even point once
exceeded increases business profitability.
These 6 essential formulas of accounting will help you attain a clearer
understanding of how to conduct your business efficiently. They will
increase your capability to yield high profitability.
Small Business Bookkeeping Beginner’s Guide
It is not easy to keep track of business finances manually and ensure that
they are accurate and up to date all the time. After sometime, one can easily
get tired and overwhelmed, considering there is still so much to do in an
office. That is why many business people prefer to use software to keep
everything in order as they attend to other important matters in the business.
Basically, software will help you keep track of the money that the business
is receiving and money that you are spending on an everyday basis, to keep
track of the money that the business owes others and how much others owe
it. Through the software, one can easily know just how well the business is
doing at any time of the year. Business people who have been doing all this
manually should know how much they are missing out and how much time
they are wasting, which can be useful in the business in other ways.
QuickBooks is more than an accounting program. It is a program that will
bring out the most creative strategy of your business. It will help you make
smart choices that affect every bit of your business fast enough. This is the
way business people need to go in order to complete their business tasks in
an automated way, which is essential for any business that is growing. As
your business grows, the software should be able to handle everything.
QuickBooks helps to manage the following:
Disbursement tracking
Data synching
Record of daily financial dealings
Automated invoicing of periodic accounts
Bills and salary payments
SME owners normally use QuickBooks to manage their accounts, pay their
bills, and track their cash flow. They also use it to produce monthly and
annual reports, as well as to prepare quarterly or annual income taxes.
Business owners typically run QuickBooks themselves or use internal or
external accountants.
The following are importance of QuickBooks:
1. To manage sales and revenue
You can manage sales and revenue on QuickBooks by creating a sales
tracking account for your customers. Keep track of the amount owed to you
by your customers (also known as accounts receivable) by reviewing the
due date report, which details current and expired invoices.
2. Keep track of bills and fees
By linking your bank account and credit card to QuickBooks, QuickBooks
automatically tracks your bills and expenses, so you can take on all
expenses and categorize them. If you need to keep track of cheques or cash
transactions, you can record them directly on QuickBooks in minutes.
QuickBooks can also help you pay your bills when they expire. For
example, you can ensure timely payments by creating a vendor report in
less than two minutes. Get detailed information on current and expired
invoices in this report to make sure you get started quickly.
3. Learn about your business
By managing all the cash flow and cash outflow activities on QuickBooks,
you can access multiple reports that provide valuable insight into your
business. All reports are prepared in QuickBooks and can be done with just
a few clicks. When you enter and save a transaction, the report is updated in
real-time.
It would be useful if you need to provide funds to potential investors or
lenders for small business credit lines. In addition to the debtor reports and
payability reports we discussed earlier, you can also create the first three
reports that are required to evaluate the overall health of your business:
Profit and loss statement
Balance sheet report
Cash flow statement
Profit and loss statement
Profit and loss statements can be created in minutes. By summing up
revenue minus expenses, you can show your profitability. It shows your net
profit (loss) over a period of time (for example, a week, a month, or a
quarter). The following is a statement of profit and loss for the fictional
entity, Paul's Water Supply, from January 1 to September 29, 2016:
Balance sheet report
The balance sheet is a statement of the company's assets and liabilities for a
given day called the balance sheet date (e.g., at the end of a given financial
year). Assets presented in the balance sheet are resources controlled by the
company. On the other hand, liabilities show all sources of financing for
these resources. Create a Balance Sheet Report in QuickBooks with just a
few clicks.
Cash flow statement
At QuickBooks, you can quickly create a cash flow statement. The report
shows you all the activities that affect business cash inflows and outflows.
4. Perform payroll calculation
Salary is an area you do not want to do manually. Errors in the computation
of salaries can lead to high fines and unhappy employees. To solve this
problem, QuickBooks has its own billing feature that automatically
calculates and manages billing based on your needs.
The interesting thing about using QuickBooks payroll is that it's built into
QuickBooks, so your financial statements are always updated after you last
started your invoice. You need to purchase a QuickBooks billing
subscription to access the latest billing tables to calculate employee and
employer pay.
5. Inventory tracking
If you need to track inventory for sale, for example, QuickBooks
automatically tracks and updates the amount available and the unit price
when entering a transaction. QuickBooks provides some inventory
management reports. Although inventory tracking in an Excel spreadsheet
is possible, it can be time-consuming.
6. Simplify taxation
If you still don't believe you can use QuickBooks to simplify your taxes,
consider your fear of the tax season. Whether you need to consolidate
multiple Excel spreadsheets or organize a shoebox full of receipts, it will
take longer for tax professionals to get what they need compared to
preparing your tax return!
7. Accept online payment
One of the easiest ways to enhance cash flow is to allow customers to pay
their bills online. With QuickBooks, you can add Intuit Payments at the
touch of a button.
Once activated, any invoices that you email will include a “pay now”
button. Your client can click on this button and make a payment using one
of their major credit cards or authorize ACH payment directly from their
bank account by entering their bank account information.
How Can Your Business Benefit From Quickbooks?
Money management
QuickBooks has the ability to help small businesses manage their money.
The program aspect allows the user to enter an expiration date and payment
information for all duplicate accounts. As the invoice expires, users can
print the cheque directly from QuickBooks. In addition, each transaction is
recorded for easier access in future reviews. QuickBooks users can also link
their bank account to the program. This feature not only allows you to view
all your financial records on a single screen but also the advantage of not
requiring paper reports.
Cost report
When doing business, professionals typically pay different fees before
billing a consumer. No matter what the size or type of spending,
QuickBooks has a feature that allows users to record their personal
expenses. Additionally, depending on the customer or business, cost savings
can be achieved so that the user does not have to adjust costs manually.
Sales order
QuickBooks offers time-saving sales tracking and automatic receipt and
invoice creation with the push of a button. The invoice can then be sent
electronically to the buyer via email. Through the program, customers can
also pay bills separately or in bulk.
The report
Users of QuickBooks Pro can create various financial statements. These
include annual revenue, expenditures, trends, and forecast documentation.
Also, any report can be exported to Ms. Excel worksheet format and sent
electronically via email.
Easy to use
The maker of QuickBooks Pro made the software easy to use. The new user
configuration feature allows users to create virtual orientations. In addition,
most program features can be activated at the touch of a button.
QuickBooks is an accounting software that is used by business people who
want to keep their business finances accurate and well organized all the
time. With QuickBooks, you do not need accounting knowledge; the
software does most of the work for you. QuickBooks comes with basic
accounting, invoicing and reporting capabilities. Other than that, it will help
you handle things like payroll, credit card processing, inventory tracking
among others.
Why this is important
It is not easy to keep track of business finances manually and ensure that
they are accurate and up to date all the time. After sometime, one can easily
get tired and overwhelmed, considering there is still so much to do in an
office. That is why many business people prefer to use software to keep
everything in order as they attend to other important matters in the business.
Basically, software will help you keep track of the money that the business
is receiving and money that you are spending on an everyday basis, to keep
track of the money that the business owes others and how much others owe
it. Through the software, one can easily know just how well the business is
doing at any time of the year. Business people who have been doing all this
manually should know how much they are missing out and how much time
they are wasting, which can be useful in the business in other ways.
QuickBooks is more than an accounting program. It is a program that will
bring out the most creative strategy of your business. It will help you make
smart choices that affect every bit of your business fast enough. This is the
way business people need to go in order to complete their business tasks in
an automated way, which is essential for any business that is growing. As
your business grows, the software should be able to handle everything.
QuickBooks helps to manage the following:
Disbursement tracking
Data synching
Record of daily financial dealings
Automated invoicing of periodic accounts
Bills and salary payments
Getting started
Once you get your QuickBooks software, the first thing you need to do is to
customize it. This is because the program works automatically and
customizing it will make it more useful in your business. Personalizing your
software will help it serve your most basic needs. This is how you will
customize it:
The industry type: setting your program to your industry will give you
access to some of the best charts that are suitable for your industry. You
might choose to use those charts or reject them later for better ones.
The business type: this is an important part of the process. Setting this will
make your tax preparations simpler and it will also determine how your
charts accounts will be controlled.
The invoice type: set your invoices in the way that you want them to appear,
for instance in the color, layout and images of your preference. Ensure that
you present information in your invoices the way that you feel will be
appropriate for your clients.
Download preferences: downloads will always be done on your own
schedule, therefore change this setting so as to only get downloads when
you need them
The vending techniques: this will be important because the program will
work as per what you are selling, where you are selling it from and also
how much you are selling it for. This is the category that will help you to
enter and pay your business bills. It will help you control your stock much
easier through its different categories like enter bills against and receive
inventory.
Banking: this is an important function that will help you view your banking
activities in a clearer way. It will also help you create and print checks for
your customers.
Chart of accounts: you need a clean chart of accounts.
Customers: this category enables one to generate sales receipts through
point of sale creation.
Why Your Business Require A Bookkeeping
Apart from keeping your accountant excited, there are other series of
reasons your small business deserves bookkeeping. For instance, accurate
bookkeeping will get you prepared for tax seasons, helps you to understand
where your business' losses and profits stem from. Also, it will help you
stay off huge debts.
When your books are in good condition, it is possible to make sense of your
general income and search for areas where you might be overspending.
With this type of information within your needs, it is then possible for you
to pay attention to your business activities toward your business products
and services that are profitable.
It can also assist in cutting back on non-essential spending to save yourself
some good cash. Proper bookkeeping allows you to make informed
decisions that will grow your business as desired.
When you keep detailed financial records, securing investors will not be a
hassle. Also, accurate bookkeeping reflects on you as the business owner, as
you can forecast where your business is heading and where all your
expenses are going.
Keeping your books in order, make it simpler and more comfortable to paint
your business’ current financial state correctly, and its economic strength
for future breakthroughs.
Even if in a year, your business didn’t make much money, if you have the
records to show to investors that your company is profitable regardless of
that fall, investors can be confident that their decision to support you won’t
be fruitless. Additionally, bookkeeping is also a meaningful way to
understand your business correctly.
For example, if you run a restaurant and you newly introduced a new menu
item in the last six months? Have your profits been increased or reduced
just immediately after that?
If you have been keeping accurate records, your books will then, plainly
show to you whether the profit you have stems from customers that are
purchasing that specific item or if it was just as a result of general increase
in the number of customers.
If it’s the former, revamping your menu toward similar products would be
excellent; however, if it’s the latter, you may decide to revisit a specific
successful marketing campaign you did during this period.
Running a restaurant in this way will safeguard you from gambling. Thus
you can confidently make business decisions accurately.
Finally, keeping records is vital for filing taxes. Identifying exactly how
much you made and how much you’ve spent on some specific products and
expenses during the years helps in filling a tax return that is not falsified.
Instead, it is going to be accurate, fair, and earns you rebates and deductions
that your firm deserves.
Hiring an intelligent, yet experienced accountant to carry out your
bookkeeping procedure can indeed be helpful, most importantly in the first
few years of business opening when you might have your focus on other
aspects of the company.
Speaking up with a professional is one beautiful way to understand
bookkeeping essentials. There are plenty of small-business owners that
have chosen to hire a professional.
However, some have decided to make the work happen by themselves. If
you are sure of your ability to keep records, then it could be a low-cost
option for you. Now let’s analyze those essential elements of bookkeeping.
Setting Up Quickbooks
There are two significant steps needed when you intend to use QuickBooks.
Firstly, like every other software, QuickBooks requires installation on the
computer system you want to operate it on. Secondly, you need to run the
EasyStep Interview. This chapter discusses the two steps extensively,
ensuring that all aspects of the steps are covered. Before we start the
discussion on the setup of QuickBooks, I’d like to mention the necessary
plans you should have and the possible errors that you may have to fix.
These errors are usually created by the EasyStep Interview.
Planning your new QuickBooks system
First, there is a need to recognize the concept of accounting itself and what
accounting systems do. Understanding accounting and accounting systems
are essential in launching QuickBooks as it enhances our knowledge on
how to use the program.
What accounting does
Let’s start our discussion with the definition of accounting. While many
individuals have diverse opinions about accounting, there are four core
features pertinent to business accounting:
Measures profits and losses.
Reports on the financial position or balance sheet of a firm
(its assets, liabilities, and net worth).
Gives thorough and complete records of the firm’s
financial position (assets, liabilities, and owner’s equity
accounts).
Provides financial information to investors
shareholders, especially the management.
and
What accounting systems do
In this section, we shall mention the basic functions of an accounting
system, with special focus on what small businesses can do with one.
It is used for producing financial statements such as
income statements, balance sheets, and other financial
accounting reports.
It is also used to generate business forms, such as invoices,
checks, customer statements, paychecks, and so forth.
It helps in keeping well-detailed records of important
accounts, such as cash, accounts receivable (payments
from third parties but not yet received), accounts payable
(financial obligation of a firm to its creditors or vendors),
fixed assets, inventory items, etc.
It also performs other special functions for information
management. For instance, in the publishing business,
book publishers pay authors some money termed royalties.
As a result, royalty accounting is necessary for book
publishers, hence, they need to have an accounting system
that can produce it.
What QuickBooks does
Following our understanding of accounting and the basic functions of
accounting systems, we can proceed to highlight the basic uses of
QuickBooks. Just as other accounting systems, the functions of QuickBooks
include, but are not limited to:
QuickBooks is used in producing financial statements;
It creates several standard business forms such as
paychecks, checks, credit memos, customer statements,
customer invoices, and purchase orders;
It helps to keep comprehensive records of several
accounting reports: accounts payable, inventory, cash,
accounts receivable, and many more.
It is noteworthy to stress that QuickBooks can perform virtually all the
functions of accounting systems. This assertion is evident in the similarities
of the roles I have provided using accounting systems and QuickBooks.
However, the only limitation of QuickBooks is its inability to perform
special accounting functions like conventional accounting systems do. For
instance, QuickBooks cannot generate the royalty report for book
publishers.
Cons of QuickBooks
While QuickBooks does virtually all the reports of an accounting system,
the reports created by QuickBooks most times are incomplete. Hence, you
must be careful when using QuickBooks to ensure that all errors are
corrected.
You also need to know how to manipulate the accounting requirements on
QuickBooks when you intend to create special accounting reports.
QuickBooks gives room for a lot of flexibility among individuals and
businesses. The book publishers can’t create royalty accounting reports in
QuickBooks, while it can be used for special reports by other businesses.
Royalty accounting requires an ample size of manipulation during the setup
of the QuickBooks
However, QuickBooks has certain limitations that reduce its efficiency.
Below are several weaknesses of QuickBooks.
QuickBooks Basic and Pro cannot efficiently handle data
on manufacturing inventory. Meanwhile, QuickBooks
Premier supports basic manufacturing accounting. That is,
QuickBooks Premier helps in accounting for the process of
converting raw material or inputs into finished goods.
QuickBooks cannot adequately account for inventories
stored in several warehouses or multiple locations. In other
words, it will give you the aggregate number of inventories
available without giving specific information about the
locations of the inventory.
Despite the limitations mentioned above about the incomplete solutions it
provides, QuickBooks remains one of the best accounting softwares with
credible accounting solutions. This is because QuickBooks carries out its
basic functions perfectly. While we cannot write off smaller accounting
solutions for small-scale businesses, functions of QuickBooks cannot be
overemphasized due to its durability and excellent accounting functions.
Installing QuickBooks
Installation of QuickBooks is done in the same way other computer
application programs are installed. Also, its installation depends on the
version of Microsoft Windows you have. Generally, recent versions of
QuickBooks involve placing the QuickBooks CD into the DVD drive or
CD-ROM. After this is done, Windows recognizes the QuickBooks CD as a
CD with a new application program. Then Windows processes it and starts
the installation of the QuickBooks software. With this illustration, it is
obvious that the installation of the QuickBooks software does not require
any special skill or activity. The only task involved is to follow the
instructions displayed on the monitor. You will need to enter a code during
the installation process. This installation code or installation key is available
within the QuickBooks packaging (usually at the back of the CD envelope).
QuickBooks installation process may have some questions for you about
how you prefer your installation. Just like other application programs, the
default suggestions are the most recommended. For instance, QuickBooks
may request for your folder preference; that is, it may ask if you want a new
folder or an existing one. It is recommended for you to choose the new
folder option.
However, your Microsoft Windows version may not recognize the
QuickBooks CD immediately. In this case, you have some options:
First, you can wait a while to see if Windows will
eventually recognize that a CD has been placed in the CD
ROM or the DVD drive. The QuickBooks installation may
start after a while. Note that it may take a long period of
time before the installation starts.
The second option is to force the installation of the
QuickBooks software. Microsoft Windows comes with a
tool used for adding and removing new application
programs. The feature is named Add/Remove Programs.
Dealing with the pre-interview jitters
After the installation of QuickBooks, the next step is to run the interview
setup to suit the accounting system of your firm. In the next section, we
shall discuss the necessary steps you need to take before running the
QuickBooks setup interview. Understanding these steps will increase your
efficiency in using QuickBooks. We shall also discuss the overview of the
necessary tasks in the setup interview.
Preparing for the interview
When you want to run the interview, you need to provide some information
to QuickBooks. The EasyStep Interview requires the following:
Accurate financial statements that tally with the date you
installed QuickBooks.
Complete financial records of your accounts receivable,
accounts payable, fixed assets and inventory.
A comprehensive list of vendors, customers, employees,
and inventory items (that is, items bought or sold at that
period).
To avoid wandering around searching for data during the setup interview,
you should have all these documents at hand before you begin. It is
noteworthy to mention that you will need to make some accounting
decisions during the EasyStep Interview. For instance, you will need to
decide if you want an account payable or account receivable. You will also
need to decide if you want to create customer’s monthly statements. In
some cases, you will also decide if you want to produce estimates for your
customers. You may be asked if you intend to use classes to track your
expenses and income. In general, when asked if you want to make some
accounting decisions, to be on the safe side, you can easily accept the
default options.
However, the law requires you to be consistent with your accounting
principles and systems for the purpose of taxation. If there is the need for a
change in your accounting method (technically termed by Internal Revenue
Service as Change of Accounting Method), you must send a request to the
IRS for the change to be done. How to go about this procedure is outside
the scope of this book, however, as mentioned above, the IRS mandates that
firms be consistent with their accounting methods. For instance, if you have
a line item that you treat as an expense or income, you do not just change
the calculating metrics without duly consulting the IRS. It is necessary to
take this action to avoid being charged for financial malpractices. Finally,
you should also get the data on your tax return from the previous year as it
is also required in the EasyStep Interview. Your tax return provides
information such as the registered or legal business name, your method of
accounting and most importantly, your tax payer ID.
What happens during the Interview?
As you go through the setup interview, you will work with QuickBooks to
categorize your initial trial balance, to structure your Chart of Accounts,
and to upload your key master files. The Chart of Accounts identifies your
income, asset, expense, owner’s equity and the liabilities accounts that you
calculate in your financial statements. In the case of the trial balance, it
calculates the year-to-date figures of your income and expenses, together
with assets, liabilities, and equities as at the conversion date. The master
files ensure the storage of information that you recurrently use about
clients, vendors, inventory items, and your employees. For example, the
master file for customers keep personal information such as customer’s
name, phone number, contact person and address. As mentioned earlier in
the previous paragraph, you will also need to make some accounting
decisions while walking through the interview. For instance, you will
decide if you intend to use accounts payable and accounts receivable.
Running the EasyStep Interview
After installation of the QuickBooks program, the Windows installation
program may automatically launch QuickBooks and the EasyStep Interview
may begin afterwards. However, you can begin the EasyStep Interview
yourself by launching the QuickBooks program. Starting the QuickBooks
program is an easy one as it is launched the same way you launch any other
program by selecting File -- New Company command.
The big Welcome
The Welcome part of the EasyStep Interview requires stepping through
about half a dozen screens of information. One of the first screens informs
you that you can pay for help from a certified QuickBooks advisor. By the
way, QuickBooks advisors pay some amount of money, usually $500, to
Intuit for a copy of QuickBooks advisors. After the payment, they get listed
on the QuickBooks website as a certified QuickBooks advisor and they get
paid to render help for new QuickBooks user.
The Welcome part of the EasyStep Interview also provides basic
information about how to go about the interview process. It will also
provide all the information you need for the whole process. Make sure you
read through all the information carefully before selecting the Next button.
Regardless of the installation process you choose for your QuickBooks, the
first message to be displayed on your monitor is the Welcome tab of the
EasyStep Interview window.
Supplying company information
The Company Info tab gathers several important pieces of information,
such as your company name, your company address, the firm’s legal name,
and your federal tax ID number, the first month in the income tax year
(usually January), the type of income tax form that your firm uses in
reporting to IRS. The tab also collects information like the type of industry
you operate in and your business operation (retail, service, and other
business operations).
All you are required to do is to accept the names suggested and the location
of the suggested folder. However, you may choose to save the data file in
another folder named My Documents; it is a good idea to do so.
Based on the information you provide about your industry type and the tax
form that you provide the IRS, QuickBooks recommends a beginning
category of accounts. These accounts are the classes of accounts that are
used to track your firm’s expenses, income, assets, liabilities and owner’s
equity.
Choosing your preferences
After providing high-level company information through the EasyStep
Interview, QuickBooks asks several questions about your preferences.
These preferences enable you to switch different features on and off within
QuickBooks accounting. You also adjust how QuickBooks looks and other
things. Here are the first questions that the Preferences tab asks:
Does your firm keep inventory?
Do you want to monitor the inventory that you buy and
sell?
Do you gather sales tax from your clients?
When do you sell items?
What invoice format is acceptable to you to bill
customers?
Do you prefer to use sales orders to monitor customer
orders and backorders?
Do you want to use QuickBooks to assist with your
employee payroll?
Do you want to arrange written or verbal estimates for
your customers?
Do you ever prepare more than one invoice for one
estimate (if you want to do progress billing or partial
billing)?
Would you like to track the time that you or your
employees spend on jobs or projects for customers?
Do you want to use classes to further segregate income and
expenses, assets, liabilities, and owner’s equity data?
How do you want to handle bills and payments (enter the
checks directly, or enter the bills first and the payments
later)?
How often do you want to see your Reminder List?
Do you prefer to view reports on an accrual or cash basis?
Setting your start date
Perhaps the biggest decision that you make when setting up any accounting
system is the day on which you will start using your new system. This is
termed the conversion date. Typically, you will prefer to use an accounting
system on the first day of a new calendar month or the first day of a year.
QuickBooks makes use of the Start Date tab of the EasyStep Interview
dialog box to explain the importance of choosing an appropriate start date.
You may also be prompted to signify the start date with the use of the dialog
box.
Adding income accounts
After you have completed the standard set of EasyStep Interview questions,
QuickBooks requires that you add any expense accounts or income
accounts that you will need for your company.
To generate a new income account, select the Yes radio button, select Next,
then enter a name for the account into the Account Name box that shows on
the monitor. If you’re comfortable with the result, specify on which line of
your tax form this account gets reported. For example, if you entered an
account that tracks gross sales for a sole proprietor, you may put the
account name Gross Sales into the Account Name box. Then you can select
Income: Gross Receipts or Sales from the Tax Line drop-down list box.
You can also add several accounts for tracking income. To do this, you
specify that you want to add another income account when you are being
asked. After you add the last income account, QuickBooks will ask you to
crosscheck the expense accounts that have been set up on your starting
Chart of Accounts. To add an expense account, you follow a method that is
very similar to the process of adding an income account. For instance, you
give the account an account name. If possible, you signify the tax line on
which the expense account gets reported.
Working through the Income Details introduction
After you have described the income and expense accounts that you prefer,
QuickBooks takes you through a part of the EasyStep Interview termed the
Income Details section. The Income Details section will also ask about how
you prefer your income accounts that your firm wants to produce. For
instance, the first question that QuickBooks enquires is whether you get full
payment at the time you sell a product or render a service. QuickBooks also
enquires if you prefer to issue prompt monthly financial statements to
customers or simply use invoices to bill customers.
Signifying your income items
You also use the Items tab of the Income Details section to signify the
explicit things that you sell. In this section, the first enquiry made by
QuickBooks is what products you offer or services you render. After
indicating the type of service item that you would like to set up,
QuickBooks shows a dialog box. To set up any service item — or any other
preferred item — you need to name the item and give the item a
description. Most importantly, you should also give the item a price.
Furthermore, you need to mention the income account that should be used
when tracking the sales of the item and whether the service item is rendered
by another person called a subcontractor.
QuickBooks also asks you set up other types of items aside from services
rendered. For instance, if you sell inventories, you need to set up inventory
items. If you charge your customers for other things, such as freight or sales
tax, you also need to set up relevant items for these. The major thing that
you need to understand here is that you can always set up a QuickBooks
item for any line item that you want to see on your invoice.
Setting up your inventory balances
The question on the Inventory tab gathers relevant information on the
inventory items that you buy, hold, and sell. After signifying an inventory
item, QuickBooks requires that you specify the type of income account that
should be used when tracking the sales of the item. You also need to give
the necessary purchase information you have.
How Bookkeeping Works
QuickBooks allows you to perform business tasks relating to bookkeeping
and accounting. Some of the tasks you need to do occur daily, while others
are less frequent. The program takes the information you provide regarding
revenue and expenses, allocates information to certain customers and
vendors, while keeping track of the bills that are outgoing and in-coming.
From the information supplied, QuickBooks maintains your bank account
balances to show you how much money you have in the bank, and what
needs to be spent. You can also draft reports to overview the financial
health of your company. The following information breaks down the three
parts to help your understanding of how QuickBooks works for businesses.
You can break QuickBooks into three parts:
Daily Tasks
Occasional Tasks
Housekeeping Procedures
Daily Tasks
Daily tasks are the everyday items you take care of for bookkeeping.
Creating Invoices
Creating Credit Memos
Payments
Paying Bills
Inventory
Checkbook Details
Paying Electronically
Each business has a need to create invoices. Invoices are sent out to those
with accounts, such as a library picking up books on account, at a
bookstore, and then paying their bill.
Businesses also send out credit memos when an overpayment or issue has
occurred.
For payments, you typically send out invoices, but sometimes you need to
keep on top of the company to ensure you get paid. You can also use
QuickBooks as a Point of Sale system depending on your company’s goods
and services. You can use it to take payments for services or goods.
QuickBooks keeps track of the bills you pay and the bills that are becoming
due. When you get an invoice or packing slip from a company for goods
you bring in, QuickBooks can keep track of the payment terms and alert
you to a payment needing to be made, as well as keep track in your check
register of the payments you have made.
Furthermore, if you have a company where you make payments online for
goods or services, you can use QuickBooks to send payments or even to
take payments using electronic means or credit cards.
Occasional Tasks
On occasion, your business will have things that need to be done like
printing checks. You probably don’t send out payments each day, so these
tasks are more about the weekly or monthly options.
Printing Checks
Payroll
Creating the Budget
Printing checks is often a thing you will do once a week, and then twice
monthly for payroll. Creating a budget is also something you do once a
quarter and a yearly basis, which means you need to know that you can use
QuickBooks for these tasks and how it works.
Housekeeping
These are chores you do occasionally, most often for accounting needs and
business health.
Balancing the check register
Reporting, such as sales tax and other taxes
Job Estimating, Billing, and Tracking
File Management
Fixed Assets and Vehicle Lists
When you get your bank statement, you reconcile your check register with
the information on the bank statement. You also have sales tax and other
taxes to pay or report about monthly.
QuickBooks is available to help you estimate job expenses, employment
needs, billing and tracking of those jobs.
As with any business, you need hard copies of the files and a way to
manage the different vendors, suppliers, customers and sales. These are
housekeeping concepts when it comes to making sure your files are up-todate.
Fixed asset and vehicle list maintenance is something you do when a new
asset is purchased, an old one is sold or disposed of, and when you add new
vehicles or trade out old ones. Your company needs a list of the assets;
particularly, for the valuation and depreciation of them.
These are just a few of the topics that help you understand how QuickBooks
works to provide you the information you need to perform daily, monthly,
and housekeeping business tasks.
Preparing Financial Reports
How to Prepare Financial Statements
Financial statements are used to help you understand how your company is
doing based directly on the data gathered by operating. One of the most
important of the financial statements is the profit and loss statement. This
statement compares your income and your expenses to show you exactly
where your bottom line is. You run profit and loss statements to cover a few
days or even whole quarters of the year, but you should be running one at
least once a month in order to stay up to date with your finances.
Head over to the reports page from the sidebar menu. This will take you to
the recommend reports page. The first option should be the profit and loss
report. If it isn’t, you can always find the report under the all reports option.
As you begin to use more reports, you’ll be able to find the ones that you
use most under the frequently run tab. For now, let’s click on the blue run
button next to the profit and loss report.
The first time you run a report, QuickBooks will bring up the report basis
box. Here, you can enter cash basis or accrual basis. Cash basis means that
you count income and expenses only when you actually receive or pay
money. Accrual basis means that you count income or expenses as soon as
you receive a bill or send an invoice. A lot of companies use cash rather
than accrual because it is easier and also reflects the money that is currently
in the account at any time rather than the money that may or may not be in,
depending on how long it takes those invoices to be paid.
The next screen lets you change the report filters. You can print, email, or
export the report. You can also customize the report, which we’ll look at
doing in the next section. Most important here is the fact that you have to
set the transaction date for the report. This is the time period which the
report will cover. Click the run report button and take a look at your profit
and loss statement.
The profit and loss report that you created has four key sections. The first is
your income. This covers how much money you made for the period of
time the report covered. Section two is the cost of producing your products.
Section three shows the expenses that you’ve had to cover during the time
period. The final section is the net income section. This calculates how
much money you actually gained or lost by calculating the other three
sections for you.
With that, you have made a financial statement. It was pretty easy because
we just ran the report on its own. It should look pretty boring at this point.
Let’s personalize our reports a little going forward so that people know they
are for our company.
Customizing Reports
Creating reports is super easy, as you saw with the profit and loss report,
but they are definitely boring to look at. QuickBooks makes it easy to
personalize your reports to give them some flair and personality. It also
makes it easier for sorting purposes. If your reports have your logo and
information on them, then it’s harder to confuse them with all the other
paperwork that comes with running a business.
Head over to the reports page by using the sidebar menu and pick a report.
Since it is the first one that pops up, and you just saw how it looks if you
don’t customize it, select the profit and loss report. Look for the customize
button on the report filters page. If you have run a profit and loss report
before, then you won’t have to worry about selecting between a cash or
accrual basis.
Clicking the customize button will open a popup with the many options
available for you to tinker with. You will see tabs for general customization,
row/column, filter, and header/foot customization as well. In the general
customization, you can change the report period, the reporting basis, and
the number format of your report. Under the rows/columns tab, you can
play around with how the information is displayed on the final report. Filter
allows you to designate parts of your finances that you want withheld from
the report you are customizing. The header/footer section is where you can
add in things like your company’s logo and name, the report title and
period, the date and time it was prepared, and what accounting basis it is
using. In order to get the company name or logo, you must go to your
account settings and add these details there. QuickBooks then uses that
information to fill out the header and add the logo when you select them
here. Save your customizations when you’re satisfied. You can add this
custom report to a group, such as management reports, to easily access your
customized report anytime you want to run it again. Find it under the table
called “my custom reports” on the reports page.
You can customize any of the reports within QuickBooks, whether it is a
profit and loss report or a sales report. Select the reports you are likely to
use most often, customize them, and then save them for easy access.
Getting all the customizations out of the way first will make sure that your
reports always look the same and have your company’s stamp for easy
identification.
Budgeting with QuickBooks
QuickBooks Online Plus and QuickBooks Online Advanced both include a
budgeting feature so that you can use the data within your QuickBooks
application to keep on top of your expenses and make sure that every dollar is
heading to the right place. Since the best time to make a new budget is at the
start of the year, we should first set up when our fiscal year begins.
To set the beginning of your fiscal year, first click on the gear button at the top
of the screen and enter the account settings. Select advanced from the righthand menu and look for the accounting section. You’ll find a date field that
lets you select the first month of the fiscal year. Set it to whenever you plan to
begin your fiscal year by clicking the pencil icon next to the field. Save the
setting and exit back to the dashboard.
Now let’s get to building that budget. Click on the gear button again and this
time select the budgeting option that you’ll see under the tool’s header, then
look for the add budget button. In here, you’ll have to enter the budget’s name
and select the fiscal year that the budget covers. You can use the drop menu
under interval to select whether you want to create a monthly budget, a
quarterly budget or a yearly budget. Under prefill data, you can tell
QuickBooks to automatically grab data from the current or the previous fiscal
year when making the budget. Under the subdivide option, you select whether
you want QuickBooks to split up the budget depending on class, customer, or
location and select which categories you want to include in the budget. Both
this subdivision and the prefill data sections are optional settings to help you
craft a budget around your specific needs. Hit next to head to the following
step.
If you did not prefill any data in the previous step, then you will enter data into
the table provided. Enter the amounts that are necessary keeping in mind that
QuickBooks does not round to the nearest dollar so include cents using a
decimal point. As you are setting your budget on the various accounts that you
have, you may notice that some accounts seem to be missing. If you encounter
this problem, click the gear icon above the total column and make sure that the
hide blank rows option is not selected. Once you have the numbers of your
budget in place, save it and exit out.
Once you have a budget created, you can now generate a budget overview and
the budget versus actuals report. The budget overview report gives you a quick
summary of your budget, while the budget versus actuals report gives you an
overview of how much you have budgeted compared to the actual income and
expenses accrued. Click the gear button at the top, and under tools find the
budgeting option again. Find the budget you have created and from the drop
menu in the action’s column, you will find the run budget overview report and
run budget vs. actuals report buttons. Click either of these to generate a budget
report which you can then email, print or save. You can also export the budget
to Excel or PDF formats if need be. If you need to edit the budget, you can
also do so by using the drop menu from the action column. Select edit this
time to change the budget name or dollar amounts as need be. Save and close
the budget when you have made the necessary changes.
You may find yourself wanting to play around with your budget and try out
some new ideas about where money should go. Instead of doing this on a
budget that is in place currently, you can instead duplicate that budget.
Duplicating a budget may also be used to take last year’s budget and put it into
place for the coming fiscal year. Whatever the reason, duplicating a budget is
easy in QuickBooks. Under the action category, click on copy. This will open a
copy budget popup from which you enter the duplicated budget’s name and
you can change the fiscal year as you need to. Hit create budget. The budget in
front of you now should be a duplicate of the budget you copied, only with a
different year or name as you have chosen. You can now play around with this
budget to see if there are better ways of allocating your money, safe in the
knowledge that you have a copy of the budget that hasn’t been altered in any
way.
When you are done with your duplicated budget, or if you accidentally created
a budget that you don’t need, then you can easily delete it by selecting the
delete action from the drop menu you have been using to edit and generate
budget reports. Remember that once you delete a budget, you can’t undo the
action. If you delete a budget that you still needed, you will have to recreate
the budget and enter all the information again by hand.
Single Entry Vs Double Entry Bookkeeping
Single-Entry Bookkeeping (Advantages and Disadvantages)
Single-entry bookkeeping can be compared to keeping track of transaction in
your check register. Bookkeeping methods that use the single-entry method
only require the bookkeeper to record transactions as they are made, usually
bills that are paid from or deposits that are placed into the company’s main
checking account. This fairly simple form of bookkeeping is appropriate for
small companies that do not engage in many transactions. The following is an
example of a transaction record using the single-entry method:
Cash Account
Date
Transaction
Debit
Credit
January 1,
2020
Balance forward
January 5,
2020
Payment received
Balance
$100,000.0
0
$2,500.0
0
$102,500.0
0
January 7,
2020
Rent paid
$750.00
January 10,
2020
Payroll processed
$40,000.0
$61,750.00
0
$101,750.0
0
January 12,
2020
Cash sale
$8,000.0
0
$69,750.00
January 15,
2020
Payment received
$5,500.0
0
$75,250.00
January 17,
2020
Equipment purchased
January 20,
2020
Cash sale
$2,000.00 $73,250.00
$5,000.0
0
January 25,
2020
Utilities paid
January 30,
2020
Payment received
$78,250.00
$450.00
$2,000.0
0
$77,800.00
$79,800.00
Clearly, the advantage with single-entry bookkeeping is the simplicity of the
system. A short learning curve and the immediate accessibility and
transferability of this kind of bookkeeping from your experiences in personal
finance to business bookkeeping makes it an attractive option.
However, if your business has any degree of complexity, or if you require a
more accurate method of tracking your expenses, single-entry bookkeeping
may not address your needs.
Double-Entry Method (Advantages and Disadvantages)
This type of accounting is obviously more complex that single-entry
bookkeeping, However, as we have discussed, only the double-entry method
will allow you to record complex transactions that involve more than one type
of account. In addition, double-entry accounting can allow you to create a
more accurate picture of your company’s overall financial condition, including
current profitability and cost efficiency. These models can be used to generate
reports and make predictions for future growth, secure funding, and identify
opportunities for tax breaks or optimization.
Cash Vs Accrual
Cash-Based Accounting
Most small businesses use cash accounting. All sales and purchases are
recognized when money is exchanged. We can explain this in simple examples
below:
Let’s say you offer some services and charge clients by the hour. Assuming
you meet the client for four hours, you will create and send them an invoice
for those four hours. In this accounting method, however, you might have the
invoice but you should not record the sales in your accounting books until the
moment the client pays for your invoice.
In another example, you visit a store and purchase some computers for your
business. However, you don’t find a printer you need, but the vendor says they
will have it delivered from their warehouse in a few hours. To ease shipping
and delivery, you ask them to send the computers and printer together the next
day. The vendor sends the items, but the invoice arrives three days later. In this
case, you do not record the purchase in your accounting books until you pay
the vendor their invoice.
Many businesses use cash accounting because it is easier to use. For a small
business, this makes sense because you record purchases and sales in a logical
manner, when you get paid.
Another benefit of using cash accounting is that it helps you track your cash
flow better. Through cash accounting method, money will only move when
something is purchased or sold. Therefore, you do not have to worry about the
risk of running into unforeseen cash shortages from time to time.
You do not record a sale until you receive the money; therefore, there is the
prospect of a lower tax obligation. Remember that when filing your taxes, you
pay on the net profit from business operations. Cash accounting means that in
some cases, you will have lower sales values to report, which means your tax
bill will also be lower. Let’s explain this with an example below.
Assuming your total sales for the year is $700,000. Of this money, you have
only received $450,000. If you use cash accounting, you will only record sales
for $450,000 because it is the only amount you have received and can account
for. Once your account for your business expenses off the $450,000, you will
end up paying less taxes from the profits if you earned any, than if you
reported $700,000 in sales.
Unfortunately, it is not always possible to control the moment customers pay
your invoices. You can only control how much of the money you receive you
can spend. Assuming you need to make some huge purchases for the business
in the course of the year, this will also help you reduce your tax bill because
you will account for the expenditure and reduce your tax return.
There are some challenges to using cash based accounting too. First, it is not
easy to accurately match your expenditure and revenues. This becomes a
problem for you, especially in a scenario where you buy some items in one
month but sell them in the coming months.
Say you purchased some items worth $60,000 in January, hoping to sell them
right away. However, you are unable to sell any of the items until April. When
you close your accounting books between January and March, you have an
expenditure of $60,000 that keeps getting carried forward, but there is no
matching revenue to offset this amount. Therefore, you will report a $60,000
loss until April when the items are sold. When you close your books in April,
you will record a profit in lieu of the $60,000 purchase. Your records between
January and March will show losses, when in real sense, you made a profit,
just that it was delayed.
When using cash accounting, you should realize that you will struggle to
convince banks to give you credit. Banks need access to your financial
statements so that they can determine how liquid you are, and your
creditworthiness. Banks generally prefer accrual accounting when advancing a
line of credit to businesses. The good thing for you is that when using
QuickBooks, you can produce financial statements using either of these
methods.
While we might have been excited about the prospect of a lower tax bill when
the money transfer is delayed, this creates some challenges later on. The fact is
that the money will still be earned at some point. When the money comes in,
you will have to account for it in terms of taxes.
Unfortunately, since we cannot account for expenditure until they are paid for
in this method, it follows that we also cannot deduct unpaid expenditure from
our tax returns. As a result, you are looking at the prospect of paying higher
taxes. Therefore, you might need to consult an expert on how to handle your
taxes so that they can help you increase your tax deductions.
Accrual Accounting
In accrual accounting, purchases and sales are recognized the moment you
receive the products, or send them to your customer. Let’s explain this using
the examples above.
In the case of the service charge, you create an invoice for your customer,
billing them for the four hours of your time. You will record the sale in your
accounting books immediately you offer the service. Whether the client pays
immediately or a few days later, the sale is considered the moment you offer
the service.
In the case of purchasing the computers and the printer, it does not matter how
long it takes for the vendor to send you the bill. The purchase was recorded the
moment they delivered the products to your business, not when you paid for
them.
One of the challenges of using accrual method of accounting is that it is not
very easy to track sales and purchases; therefore, you must be keen and record
all transactions accordingly. Without this, your accounts might not reflect a
true picture of events.
Accrual accounting is popular with businesses whose inventory and gross sales
are no less than $5 million. Why should you consider accrual accounting for
your business? One of the perks of using this method is that sales and
purchases are easily visible. Since they are recorded when they take place
instead of when money is exchanged, it is easier to track your payables and
receivables accounts. You can also use this to your advantage and make
payments when you are comfortable.
Another benefit of using the accrual method is that revenues and expenditure
can easily be matched together. If you buy some items in January for $40,000
and sell them to several customers for $60,000. None of the products are in
your stores anymore, but you are yet to receive payment from any of the
customers.
In accrual accounting, your books will show sales of $60,000 against
purchases worth $40,000. Therefore, you record a net profit of $20,000 during
the month of January. Because the purchases and sales are recorded when they
take place, your profit will be reflected in the month of January when you
close your books, instead of when the customers pay.
It is not only in the cash accounting method that you can enjoy low tax bills. In
accrual accounting, by recognizing an expenditure when the purchase takes
place, you enjoy the benefit of reducing your tax obligation by even though
you are yet to pay for the purchases.
Say you need to buy new equipment for your sales team so that they can
communicate better with customers. You place an order for the items on 16th
October and they are delivered immediately. However, the vendor bills you on
1st November. In accrual accounting, the equipment will be expensed in
October. When preparing your books of accounts for October, you can write
off the expense as a tax deduction though you are yet to pay for them.
One of the challenges of using accrual accounting is that it is not easy to use,
especially for small businesses. More often, you need to bring in an expert to
help you understand how to account for your purchases and sales, which will
cost you more. You can also use QuickBooks to make this work easier for you
by keeping track of all your cash flows. Using QuickBooks, you can create
customer invoices and enter all the bills from different vendors accordingly.
From these reports, you can tell which vendors you owe money and the
customers who owe you.
Another challenge of using the accrual method is that you must always use the
cash flow statement to monitor your cash flows. The accrual method is not the
best option when you need to monitor cash movements in your business.
Revenues and expenditures are recorded when transactions are completed, not
when cash is exchanged. Therefore, your profit and loss statement will in most
cases show more income even when the situation is different in your bank
account. As a result, you must use the cash flow statement to monitor the
actual movement of money within your business.
Let’s assume you are in the service industry, and most of your days are filled
with client meetings. After each consultation, you send clients invoices for
your services in no more than 24 hours, expecting the clients to honor their
obligations in 30 days. Your income statement will reveal these earnings,
hence a high income earned, but if none of the customers have paid, your bank
balance will not reflect these earnings. Unfortunately, if you are too busy, you
might be unable to follow-up on all the clients who are yet to pay for your
services, which can result in cash flow bottlenecks.
Accrual accounting might also result in high tax bills, especially in a situation
where you record very high sales. Since sales are recorded the moment
products move from your business, you have to record them in your tax returns
regardless of whether your customers pay. At the end of the accounting period,
the sale was recorded, so taxes must be paid for the sale.
In accrual accounting, you end up using more than one account to track
invoices and bills you have not honored yet. This creates more work for you
than you would have to do in the cash accounting method. For example, the
accounts receivable and accounts payable accounts help you monitor
outstanding balances. You will have to create these accounts in the chart of
accounts.
Given the nature of these transactions, when should you consider using accrual
accounting for your business, especially when you consider the complexities
involved? Is it worthwhile for your business? While cash accounting might
serve you well, as your business grows it becomes necessary to switch to
accrual accounting. The following are some reasons why:
Revenue approach
When your annual revenue grows to more than $5 million, you are required by
law to change to accrual accounting. At the same time, you will have to
contact the IRS, informing them of the changes in your reporting method, by
filing Form 3115 .
Inventory
Assuming that your business involves sales inventory and you record receipts
grossing more than $1 million, the accrual method of accounting is
recommended to help you record all purchases and sales. This is important so
that you can evenly match your sales and cost of sales in inventory accounting.
Besides, to determine the cost of sales, the accrual method makes more sense
than cash accounting method. This is because instead of counting the cost of
goods when you buy inventory as you would in the cash method, you will only
record the cost of goods when you sell inventory. Therefore, revenue and the
relevant costs are recorded together, which will help you match relevant
expenditure to the revenue earned.
Receivables and payables
Consider the nature of your business and sales documents. If you receive bills
from many suppliers and likewise send invoices to many customers, accrual
accounting is a better alternative for you. This way, you can keep track of all
your payable and receivable accounts.
QuickBooks makes this easier for you by keeping track of all the vendor bills
and customer invoices. When creating sales documents for customers, you can
set up the relevant payment terms for them. Therefore, each time any of the
bills or invoices are due, you receive alerts and can send polite reminders to
your customers.
QuickBooks will also remind you when your bills are due, so you can make
arrangements and pay your vendors in good time. This way, you can avoid
unnecessary penalties for late payment or incur the cost of your vendor using a
collections agency to recover their payments.
Financing purposes
If you plan on seeking financial support from a bank, we mentioned this earlier
that banks prefer accrual accounting over cash accounting. Make sure you
consider this when you need financial support.
Getting Money Back At Tax Time
As a small business, especially one that's just starting out, you have to focus on
maximizing revenues and minimizing operating expenses. And between the
two, especially for a business that is just starting out and still building up its
market, minimizing expenses is crucial. It's the only thing that a business
owner has much control over at the moment.
One of the critical components of a business' expenses is taxes. In particular
because for as long as your business earns money, regardless of how big or
small the income is, you'll have to pay taxes on it. When your small business is
still at that stage where revenues are barely able to meet operating expenses,
income taxes can shrink its already tiny income even more.
Fortunately, the IRS allows certain expense items for tax deductions, i.e.,
expenses that can make your business' tax liabilities smaller. And these are
part of proper tax management for your business.
If you're unsure of which expenses you can use to minimize your business' tax
liabilities, particularly as a self-employed small business owner, get
professional advice from a certified public accountant or CPA. You can also
use Intuit's TurboTax software to manage your taxes optimally such that you're
able to legally minimize your small business' tax liabilities and avoid getting
into trouble with the IRS.
One of the best features of Quickbooks is that it can be linked to a TurboTax,
so you don't have to spend for an accountant just to optimize your small selfemployed business' tax deductions properly. And speaking of tax deductions,
here are some that you may be able to use to minimize your self-employed
small business' tax liabilities.
Meals
Part of winning clients over and securing deals for your business is taking
clients out to lunch, dinner, or coffee. If you're in the vlogging or blogging
business, eating in different restaurants, bistros, and coffee shops is a necessity
for if you don't do it, you won't have any content to write or vlog about. If your
meals are legitimately for business purposes, then you can deduct as much as
50% of your meal expenses from your business' tax liabilities. The main
principle here is that your meals – as they pertain to business purposes – must
be within what the IRS considers as "necessary and ordinary" parameters.
Take note that the meals you use for tax deductions must be necessary for the
conduct of your self-employed business or that during the meal, you actually
discussed business matters, such as when you're meeting with a new lead or
prospect for your business. Eating lunch at a cafe that is along the route you
usually take to go back to the office from the nearest IRS office isn't
considered necessary and ordinary part of your business. Thus, it won't count
as a legitimate deduction.
Mileage
In 2018, the IRS announced the implementation of a standard mileage rate for
purposes of tax deductions. For businesses, the standard rate is $0.545 or 54.5
cents for every mile driven for business-related purposes.
Let's say you drove 10 miles going to and from your new prospect or lead's
office to pitch your business' services. Using the standard rate of 54.5 cents per
mile, you can deduct $5.45 from your tax liabilities.
That's why it's important that you make it a habit to record your mileage every
time you go out and perform business-related tasks, regardless of how short
the distances are. Individually, they may be negligible, but if you frequently
travel those short distances, they can add up to a significant amount of tax
deductions throughout the year, too.
When recording mileage for tax deduction purposes, you can use your
personal vehicle, too. Just remember to note details of your business-related
trips so that when your business is tax-audited, you can support your
deductions with documentary evidence.
Tax Deductions for Home-Based Businesses
If you're running your small business from home, you can take tax deductions
on it, too. These may be deductions that you'll regret missing come tax season,
especially if their amounts turn out to be quite significant.
When it comes to maximizing your home-based business tax deductions, it's
important that you know the clear difference between meaningful or helpful
itemized tax deductions and standardized deductions.
If your business has minimal operating expenses, taking itemized deductions
will be more costly than beneficial, especially if it turns out that your itemized
tax deductions are much smaller than standardized deductions. Before
deciding which type of tax deductions to take for your home-based business,
make sure to evaluate which of the two will most likely end up with lower tax
liabilities for your business.
When it comes to home-based business expenses, there are two kinds: direct
and indirect. Direct expenses are – as the name implies – expenses directly
charged to the business. An example of this is employees' salaries, a dedicated
Internet line under the name of the business, and your business' accountant's
professional fee. You can claim 100% of direct expenses as tax deductions for
your home-based business.
Indirect home-related expenses, on the other hand, refer to expenses that aren't
directly or entirely charged to a home-based business. Take, for example, the
expenses related to maintaining and repairing your home, which is used as
your family's home and your business' primary office. These include utility
bills and homeowner insurance premiums that are charged to the account of
the homeowner, not the home-based business.
How much of indirect home-related expenses can you use as tax deductions
for your home-based business? It'll be based on how much of your home's
floor space is occupied by your home-based business. To determine that,
simply divide the floor area occupied by your home-based business by the
total floor area of your home. If your home has a total floor area of 500 feet
and your business uses 50 feet, that's 10%. If your total home maintenancerelated expenses are $1,000, you can use 10% of that (e.g., $100) as tax
deductions for your business.
What can be considered as qualified or legitimate home maintenance expenses
for purposes of taking standardized tax deductions for a home-based business?
These include:
1. Home repairs and maintenance work;
2. Homeowner's insurance;
3. Homeowners' association dues;
4. Interest on home mortgage payments;
5. Property taxes;
6. Security expenses; and
7. Utility bills, e.g., electricity, internet, water, heating, etc.
But before you even try to take home-based business standardized deductions
for your small business, make sure you clearly understand what the tax law
says about it. In particular, you must make sure that the area your home-based
business occupies is strictly for business-related activities. This means you
can't let your kids do their homework in your office space or let your spouse
entertain guests there. Otherwise, it won't be and exclusive office anymore,
and it will nullify the home-based business standardized tax deductions.
For it to be considered as a legit and official office, your business' registered
address must be your home address. It must be the official place where you do
business. Even if you use a particular area of your home purely for business,
you won't be allowed to take the standardized deduction because, on paper, it's
not your reported principal place of business.
How To Find A Bookkeper
If you, as the business owner, is also the bookkeeper for an extended period of
time, then you may want to outsource your bookkeeping. This can be the most
cost effective as you are only paying for a couple hours of work. On the other
hand, if you had an employee assigned to it, you are paying a monthly wage.
You can also outsource to ensure that the books are being handled by a
professional and will be accurate.
In general, it could take a professional bookkeeper only two to four hours to
process an entire month of transactions and provide your business the monthly
reports you require.
If you feel that you can handle some of the bookkeeping and only want the
professional to handle specific areas you can do that as well.
One of the benefits of outsourcing to a professional is that they can give great
business advice that will help your business grow. Some of this advice could
be, but is not limited to:
New software and if they would be a good fit for your
business
Attend business meetings with you and your banker
Help with annual budget and cashflow reports
Train office employees
What Is And How To Use Quickbooks
Bookkeeping is an accounting concept that refers to the act of recording,
verifying, retrieving, storing, and organizing the financial transactions carried
out in a business or organization. Bookkeeping is sometimes called record
keeping. Bookkeeping is an aspect of financial accounting that deals with
recording financial transactions and events in a business or organization.
Bookkeeping can be carried out manually or with the use of bookkeeping
software. The principles of financial accounting lie in keeping accurate and
up-to-date records. Therefore, bookkeeping is the basis of financial
accounting. It is the source of information for most of the accounting systems.
Bookkeepers are trained to use their analytical skills in recording financial
transactions because most accounting information is sourced from these
financial records. There are different aspects of financial accounting; these
include bookkeeping, auditing, share valuation, financial forecasting, etc.
Without bookkeeping, none of these aspects can function; bookkeeping is the
backbone of financial accounting.
Bookkeeping provides well-detailed and accurate information from which
other accounts like balance sheets, trading, profit and loss accounts, ledgers,
and depreciation, among others, are prepared. Without bookkeeping, none of
these accounts can be prepared. Bookkeeping is a vital aspect of financial
accounting.
Each financial transaction in a business must be recorded. There are ways in
which these transactions are recorded. Bookkeeping does not only involve the
recording of figures, but it also records financial transactions and events.
Bookkeeping is essential for a business to thrive.
The concepts of bookkeeping and accounting are often used interchangeably,
although they are separate. Bookkeeping is a vital aspect of accounting, while
accounting is the general way of managing a business's finances. A person
who studies bookkeeping is referred to as a bookkeeper.
A bookkeeper must understand some accounting principles and how
transactions should be recorded. The process of recording and organizing
transactions is called bookkeeping. Accounting is a broader concept and
should not be mistaken for bookkeeping. Bookkeeping is simply an aspect of
financial accounting.
Gone are the days when bookkeeping was done manually, the process of
recording and organizing financial transactions has been made easier in today's
world. Bookkeeping can be carried out via computer software. There are
several programs used for recording and organizing transactions.
Keeping accurate and up-to-date records of all transactions is vital in
bookkeeping. Bookkeeping is useless if the transactions recorded are not
accurate. The most important factor in bookkeeping is accuracy. Bookkeeping
is done to offer well-detailed and accurate information required to create
accounting statements.
The Importance of Bookkeeping
Bookkeeping is very important in small businesses. Bookkeeping is a core
aspect of accounting. It is important in all businesses and organizations
regardless of the type or size of businesses operated. Businesses can fail
because of poor bookkeeping. Below are the reasons why bookkeeping is
important.
Organization
When bookkeeping is defined, the word organization is used. Bookkeeping
deals with the recording and the organizing of transactions. The organization is
very important when running a business. A successful business owner is one
that is very organized in all activities carried out.
Bookkeeping helps you gain access to the necessary details regarding your
business. For instance, if you need some details about sales, an effective
bookkeeping system will help you get the necessary information you need.
Some parties, like employees, Internal Revenue Service, customers, lenders,
researchers, auditors, and investors, are interested in your financial records.
Providing these parties with accurate and well-detailed information can help
your business.
The Internal Revenue Service can penalize you, as a business owner, if you
refuse to provide the required, necessary records. Investors may stop investing
in your business if they lack access to your records. Staying organized and up
to date with your bookkeeping will help maintain a good working relationship
between you and your investors.
QuickBooks is accounting software designed to serve the needs of small- and
medium-sized businesses. QuickBooks offers both desktop accounting
applications and cloud- and web-based applications. QuickBooks is adaptable
to most accounting and bookkeeping environments and includes many
features, such as accepting and processing of payment for business services;
payment and management of bills; customer and client invoicing; and
employee payroll processing.
Although initial versions of the software did not accommodate double-entry
accounting methods, it became very popular very quickly with many small
business owners who had no formal training in bookkeeping and accounting.
Subsequent updates have allowed QuickBooks to address many of the
shortcomings of its earlier releases.
Beginning in 2000, QuickBooks was available in two versions – Basic and
Pro. In 2002, an Enterprise version was released for medium-sized businesses.
As of 2003, QuickBooks has released customized versions with specific
functions and workflows designed specifically to meet the needs of differing
types of businesses, such as manufacturing, wholesale, professional service
firms, retailers, and non-profit organizations. There is even a version
specifically designed for professional accountants that is capable of addressing
all GAAP-required functions, such as creating audit trails and generating
highly detailed professional financial statements. Over 50,000 accounting
firms are members of the QuickBooks ProAdvisor program, and as of 2008,
almost 95% of the bookkeeping software market was dominated by
QuickBooks.
The most recent versions of QuickBooks included updates that enable batch
transactions, bill tracking, automated reports, smart search, and improved
report filters.
QuickBooks is accounting software designed to serve the needs of small- and
medium-sized businesses. QuickBooks offers both desktop accounting
applications and cloud- and web-based applications. QuickBooks is adaptable
to most accounting and bookkeeping environments and includes many
features, such as accepting and processing of payment for business services;
payment and management of bills; customer and client invoicing; and
employee payroll processing.
Although initial versions of the software did not accommodate double-entry
accounting methods, it became very popular very quickly with many small
business owners who had no formal training in bookkeeping and accounting.
Subsequent updates have allowed QuickBooks to address many of the
shortcomings of its earlier releases.
Beginning in 2000, QuickBooks was available in two versions – Basic and
Pro. In 2002, an Enterprise version was released for medium-sized businesses.
As of 2003, QuickBooks has released customized versions with specific
functions and workflows designed specifically to meet the needs of differing
types of businesses, such as manufacturing, wholesale, professional service
firms, retailers, and non-profit organizations. There is even a version
specifically designed for professional accountants that is capable of addressing
all GAAP-required functions, such as creating audit trails and generating
highly detailed professional financial statements. Over 50,000 accounting
firms are members of the QuickBooks ProAdvisor program, and as of 2008,
almost 95% of the bookkeeping software market was dominated by
QuickBooks.
The most recent versions of QuickBooks included updates that enable batch
transactions, bill tracking, automated reports, smart search, and improved
report filters.
Accounting software programs used for small enterprises employ to handle
sales and expenditures and monitor daily transactions are called QuickBooks.
They are used to create an invoice for customers, bills payment, develop
reports for planning, tax filing, and lots more.
The line of goods for Quick books comprises different answers that work
remarkably for anyone from a small scale business to middle-sized business.
Significantly, you select the correct one, as there are different QuickBooks
available. Cover some QuickBooks by registering for a free 30-day test, before
showing commitment.
The test is a complete version of QuickBooks; all the bells and whistles can be
tried. Finally, no credit card is needed.
What Small Businesses do with QuickBooks
Small business proprietors expectedly use QuickBooks to control invoices,
bills payment, and monitoring cash flows. Quick books are also used to create
month- and year-end financial information, including preparation of quarterly
or annual business taxes. Business owners themselves can manage
QuickBooks or they employ an internal or external bookkeeper.
Top QuickBooks uses in small business are:
1. Control Sales and Income
Controlling sales and income in QuickBooks can be done by generating
invoices to monitor transactions by customers. Having a stand on what
customers owe you (also known as your accounts receivable balance)
Surveying the Aging Report of Accounts Receivable, this comprises of the
information of both present and past expected invoices.
2. Monitoring Bills and Expenses
QuickBooks voluntarily monitors bills and expenses by joining your accounts
to QuickBooks; in this way, all of your costs are recorded and sorted according
to different categories.
When there is a necessity to monitor a cheque or cash transaction, it can be
recorded directly in QuickBooks within a few minutes.
QuickBooks can enable you to pay your bills when they're exhausted. Your
statements can be ensured to be paid on time by generating an Accounts
Payable Report within two minutes. This report enriches you with the details
of your current and past expected bills to address any problems quickly.
3. Access Key reporting view to Your Business
Controlling all of your financial activities in QuickBooks, you can view
essential reports about your business. The reports have been designed already,
all that is left is for you to click and get your report generated for your
transactions.
It is useful if there is a necessity to supply financials to a radical investor,
including your lender, for a small business loan or line of credit. You can work
on the top 3 reports necessary to be able to assess the total health of your
business:
Profit and Loss Report
Balance Sheet Report
A remark of Cash Flows
4. Profit and Loss Report
The profit and loss report can be carried out in a few minutes. It shows you
how lucrative you are by giving a review of your income minus your
expenditure.
The bottom line net income (loss) for a specific period, such as a week, a
month, or a quarter will be shown.
5. Balance Sheet Report
A balance sheet report is used to highlight the Assets, Liabilities, and how well
a business is doing at a specific time. In a few moments, a balance sheet report
can be created in QuickBooks.
6. Run Payroll
An area that you don't want to use carelessly by trying to do it manually is
known as payroll. Errors made in computing paychecks can bring about
penalties and sad employees.
QuickBooks helps in this aspect since it comprises of a payroll functionality
that automates the calculation and the payroll whenever it’s needed.
The fantastic thing about QuickBooks payroll is its regular payroll update
since it’s entirely with QuickBooks. Buying a QuickBooks payroll
subscription is needed to be granted access to the most recent payroll tax tables
to be able to know the number of employee and employer payroll taxes.
Gains of operating a payroll with QuickBooks are:
Pay employees via direct payment or check
Payroll tax of Federal and state employees are determined
quickly
QuickBooks helps to fill in the payroll tax forms
E-pay directly from QuickBooks
7. Track Inventory
To be able to monitor the inventory you sell, such as available amounts and
little costs, QuickBooks will control rapidly and upgrade this for you while
you input transactions. Various reports are readily obtainable to manage
inventory in Quick books.
Monitoring and inventory are feasible in an Excel spreadsheet, and it is also
time-draining. A sample of Inventory estimation brief Reports from
QuickBooks is shown below. This report displays a list of your inventory
goods, quantity available, average cost, and their total value.
8. Simplify taxes
If you doubt that you can break down your taxes with the use of QuickBooks,
think about how much tax season is feared. Combining various Excel
spreadsheets or arranging a box full of receipts, can take you more time to get
your tax expert what is required than to prepare your tax return!
At reliable Small Business, QuickBooks Online controls all of our business
accounting and taxes. The tax professional was set up with a user id and
password to gain entrance into our QuickBooks data and retrieve the data they
require to document our tax returns.
Everything is observed in QuickBooks, as it eliminates extra time spent in
arranging receipts and banknotes. This guarantees well-detailed records for all
income and expenditures and enhances the accuracy as an end product.
9. Accept Online Payments
Preferable ways to enhance your income is to give customers the option of
online payment of invoice. QuickBooks helps you include the Initial Payments
structure with a simple clicking of a button.
Quickbooks Features Pricing
If your business is a service-oriented one, one of the unique things about its
accounting and bookkeeping functions is job costing. With trading businesses,
i.e., buy-and-sell, costing of goods sold is easy and straight forward. You
simply multiply the cost per unit of goods sold by the number of units sold.
But with service-oriented businesses, job costing has different milestones or
parameters for determining how much to charge customers at specific points of
a project, job, or contract. It can even be a bit more complicated when you're
working on multiple projects for the same customer.
Let's say you're operating a digital content creation business, and one of the
services you provide customers is creating explainer videos that involve a
good mixture of live-action and animation. If you have a customer who
contracted you to create a 20-minute animated-live explainer video for the
product that he or she'll launch in 2 months, that project would have several
major components or milestones.
For example, these are the typical phases involved in creating an animated-live
explainer video:
1. Build the main concept and theme to be used for the entire video, e.g.,
mood, tone of voice, target audience, main message, and objectives of the
video;
2. Writing the script for the explainer video;
3. If the explainer video features a live instructor with an animation
background and animated objects emphasizing the speaker's points, shoot the
greenscreen explainer video of the instructor;
4. Editing the green screen video of the instructor; and
5. Laying the animation background and animated objects on the edited green
screen video to create the final version of the animated-live explainer video.
The projects you undertake for customers are jobs in Quickbooks. Job costing
helps you determine your cost of services rendered, which is akin to the cost of
goods sold for a trading business. Let's use the aforementioned explainer video
project above for illustration purposes.
To complete the 5 phases of that project, you'll incur expenses. As an agency,
you won't do the actual work of completing each of the 5 phases. You'll
subcontract them to freelance contractors, e.g., writers, cameramen, and video
editors. The rate you pay those freelancers will be part of the cost of your
project/job.
If you run a pretty tight ship and have no equipment and green screen studio of
your own, that means you'll have to rent video and audio recording equipment
as well as a green screen studio to shoot the live portion of the explainer video.
Those rentals will form part of the cost of your services, too.
Job costing allows you to monitor your job or project-related expenses to the
revenues generated by the job or project. If you don't perform job costing
while undertaking projects for your customers, you run the risk of spending
more than what you're paid for your projects. Fortunately, Quickbooks can
help you with your service-oriented business' job-costing function.
Job Costing with Quickbooks Online
The truth is, there no official job costing function in Quickbooks, online, or
offline. However, you can effectively do job costing using its sub-customers
function. So, you set up projects or "jobs" as sub-customers in Quickbooks.
Here are the steps for setting up sub-customers for job costing purposes.
1. From the list of menu options on the left side of the dashboard, click on
Customers.
2. Once you're directed to the Customer page, click on the button labeled New
Customer located on the upper right-hand corner of the screen. This should
open the Customer Information window.
3. Create the "parent" customer first, which is your actual customer for the
project.
4. Once you're done creating the parent customer for the project, it's time to
create the sub-customer or "child" customer account by clicking on the button
labeled New Customer located on the upper right corner of the parent
Customer Information window.
5. In the Company field, type the name of the job or project for this customer.
In our earlier example, it could be Product A's Animated-Live Explainer
Video.
6. Then, check the box labeled Is Sub-Customer, which will show a list of
parent customers. Choose the parent customer for which the project will be
undertaken. You can also indicate whether or not you'd like to bill or invoice
the job or project, a.k.a. the sub-customer, together with the parent or main
customer.
7. When you're done, click the Save button.
Now that you've saved a job/project for a customer by creating a sub-account
under the customer's main account, you can record all expenses related to that
project under that customer's name. When you record expenses, you'll click on
the drop-down arrow on the Customer column of the expense being recorded
and choose the client's sub-account corresponding to the project.
Quickbooks Online
QuickBooks online is the kind of program that is best suited for a business
person that is always on the go therefore he can outsource a bookkeeper or an
accountant. This version of QuickBooks comes with one great feature which is
the cloud feature. This is the version that will enable a business person to
perform customer billing automatically as well as email reports. With this
version, you can keep your financial records accurately as well as get enough
time to go out there to ensure that your customers are getting the information
that they need on time. It is therefore a very flexible program for a business
person.
This is the much preferred version for many business people because it gives
you access to the basic features of an accountant.
The cost of QuickBooks online is much lower than the QuickBooks desktop.
You get to enjoy using it for free for an entire month before you can invest in
the program. This is what makes it the best program for those business people
that are starting up.
The cloud benefits of QuickBooks online
Buying, building and maintaining a functional IT structure is a requirement in
business these days but with the increasing prices, small businesses are not
able to achieve their desires because of financial limitations. The cloud gives
businesses of all kinds and sizes a great alternative in that businesses can now
subscribe to shared services online. The benefits of this are so many, for
instance you do not have to pay for the services fully since there are several
other businesses that are accessing the same services. All you need is to be
able to access QuickBooks online. Some of the benefits that business people
get to enjoy from this are:
Time savings: time is an important element in any business. Saving time might
result to better results in a business since more time is sent on things that
matter more in the business for the realization of better results. Cloud
computing is one way through which a business can save a considerable
amount of time. This is because technology and data are always available and
you can count on them. One thing business people should know about is that
with cloud computing, you will not have to manage your software and you will
also not have to go back and forth to visit your clients or even to spend plenty
of time on data entry. This is what will save you ample time as well as your
business and also your clients
Cloud computing gives you anytime, anywhere access: the functionality of
cloud is accessible to you anywhere you will be at any given time. You can
access your work at any time of day or night, from wherever you might be
across the globe. You always get an always-on connection to your client’s
data; therefore you can still serve your clients from wherever you might be.
You also do not have to deal with time zone restrictions whenever you are
filing your tax returns. This means that you are free to do so much from
anywhere, anytime, for instance:
Adding and editing employees, customers or vendors
Viewing reports pertaining to balance sheet and profit & loss
Creating and emailing invoices
Viewing balances from your Bank account and credit card
Accessing the lists of your vendors, customers, and employee
Access of information pertaining to your debtors and creditors
Cloud computing makes it easy for you to work with your clients: this is one
program that will intensify the bond you have with your clients, without any
costs. If you have clients who want to be involved in any business operation,
you will find this program really helpful. Your clients can see what work is in
progress, how much has been accomplished and what still needs to be done.
This is what keeps an open communication between your clients and the
business.
It is easy to afford. With cloud computing, you can be sure that you will afford
all the benefits that it comes with. To start with, there are no license fees and
this means that the initial costs are already taken care of. Generally speaking,
you will incur fewer costs, which is good for business.
This is what you get from QuickBooks online
Automated customer billing instead of doing it manually which can be
inaccurate and time consuming. An automated email report which saves so
much time and also provides accurate information for your clients. So many
people can use the program at a go.
It provides an activity log which enables everyone to track down what they
have done so far. You can also see what your employers are doing at any given
time.
It gives users a simultaneous access to data. You do not need to wait for one to
work on a document for you to use it, which costs a business so much time.
Quickbooks Desktop
These two programs are made by the same company to do the same thing, but
for many operations they work differently.
QuickBooks Online is targeted mostly for do-it-yourself business owners. The
desktop versions, which is what the original product started out as, is used by
accountants as well. Most of the time, either one can get the job done, but how
you get there is different.
There are also differences between the PC and MAC versions, and switching
between these can be even more frustrating than between desktop and online.
For business owners this usually isn’t a problem. As long as you learn how to
do something in the version you use, then it doesn’t matter how it works in a
different format.
It doesn’t make sense to focus on the exact steps for some of these problems
and solutions we are going to discuss because the layout and look of the
software changes so often that step-by-step instructions could become obsolete
and confuse more than help.
Fortunately, the general principles of accounting don’t change, and certainly
not the ones that revolve around the issues we are covering here. If you learn
the concepts, the specific steps are easy enough to figure out, even if they
change a little bit from version to version of the program or online interface.
For example- once you learn how to reconcile an account, you can keep doing
it each month, even if they change the location of the button to start the
reconciliation or the place where you enter the beginning balance and
statement date.
Potential Money Saving Tip!
Side note- you may be able to save yourself the monthly cost of your
QuickBooks online subscription! If you decide to outsource your bookkeeping
to us and you don’t need to regularly get into the file yourself, we can convert
the file to a desktop version, which costs you nothing. You can then apply your
monthly savings (as much as $400 or more a year) to offset the cost of the
bookkeeping service.
This becomes an even bigger savings if you manage more than one business,
and have two or more sets of books. The desktop version can support
unlimited business under one license, but online businesses each require
separate subscriptions.
QuickBooks Online Self-Employed
This adaptation of QuickBooks is intended for specialists. It enables you to:
Track pay and costs
Organize receipts
Estimated charges
Invoice customers and acknowledge installments
Track miles
Run essential reports.
A significant note in regards to the Self-Employed rendition: If you start with
this form, you can't move up to some other arrangement. You should begin
with one of the small business software forms beneath to have the option to
move up to an alternate plan.
QuickBooks Online Simple Start:
This release is expected for private ventures and sole owners. You can easily
upgrade to different QuickBooks forms as your business develops.
It offers everything the independently employed form does, in addition to the
accompanying features:
Send measures
Track deals and deals charge
Manage 1099 temporary workers
QuickBooks Online Essentials
The following degree of the online programming incorporates the features
from Self-Employed and Simple Start, in addition to the accompanying:
Manage bills
Track time
Include three clients
QuickBooks Online Plus
The third degree of online programming propels the accompanying features
also what is incorporated with the past version:
Include five clients
Track project productivity
Track stock
QuickBooks Online Advanced
The top-level of online access gives all highlights from the past three releases,
in addition to you can:
Pay bills
See smart announcing
Accelerate invoicing
Create custom client consents and custom fields
Receive need client support and preparing
Every single online arrangement incorporates application joining, client
assistance using instructional exercises and online assets, additional finance
items (cost dependent on self-service or full-service in addition to perrepresentative expense), and a 30-day free trial.
QuickBooks Desktop Pro, Pro Plus and Mac
The work area versions of QuickBooks are introduced on your PC rather than
got to on the web. They do exclude software updates except if you pay for the
Plus adaptation, which requires a yearly membership charge.
Work area Pro costs a one-time installment and incorporates the accompanying
features:
Track inventory
Track deals and deals charge
Send invoices
Manage bills and records payable
Track pay and costs
Work area Pro Plus requires a yearly expense and incorporates the product
with highlights referenced above in addition to boundless client assistance,
information reinforcement and recovery, and access to software updates.
QuickBooks for Mac is like Pro, in spite of the fact that not actually since it
offers a few features upgraded for the Mac stage (even though QuickBooks'
site doesn't determine which includes these are).
Pro and Pro, also, to empower fare to Excel and reconciliation with Outlook;
Mac empowers fare to Apple Numbers programming, just as the capacity to
later change over to Online or Windows programming.
QuickBooks Desktop Premier and Premier Plus
The Premier degree of QuickBooks' work area programming, which requires a
one-time installment, incorporates the entirety of the usefulness of
QuickBooks Pro in addition to the accompanying extra features:
See industry-explicit reports
Create deals orders
Track costs for items and stock
Customize stock reports
Support up to five clients
The Premier Plus version, as with the Pro Plus adaptation, permits unlimited
client care, robotized information reinforcement and recovery, and access to
the most recent software updates. It requires a yearly membership expense too.
How to Choose the Right Version of QuickBooks for Your Business
If you read the diagram of each QuickBooks item, you may, as of now, have a
thought of which adaptation of QuickBooks is best for your small business. If
not, don't stress. These five inquiries will assist you with narrowing down your
inquiry and find what you're searching for.
Do You Want Cloud-Based or Locally-Installed Software?
The principal significant central factor is whether you need cloud-based or
locally-installed software.
Cloud-based programming works totally in the cloud (on the web). A few
advantages of cloud-based programming include:
Mobility
Access for numerous clients in various areas
SaaS membership-based evaluating model
Security is dealt with by the product supplier
Usually accompanies mobile applications
Locally-installed software is downloaded and introduced on a solitary, on-
premise PC. A few advantages of locally-installed software include:
No web get to required
More complex and feature-rich
Potentially increasingly secure (you are answerable for
security)
Most small businesses lean toward cloud-based programming as it is
increasingly moderate, simpler to utilize, and stays aware of our general
society’s mobile way of life. Nonetheless, locally-installed software can be
increasingly secure and offers a degree of feature depth that the cloud
regularly can't contact.
Choosing which kind of programming works best for your plan of action can
settle on your QuickBooks decision a mess simpler. If you need cloud-based
programming, there's QuickBooks Online and QuickBooks Self-Employed. If
you need locally-installed software, you can take your pick from QuickBooks
Pro, QuickBooks Premier, or QuickBooks Enterprise.
Are You A Mac or Windows User?
QuickBooks Pro, Premier, and Enterprise are altogether intended for
Windows. So in case, you're a Mac client, you're down to two alternatives:
QuickBooks Online and QuickBooks Enterprise.
What Type Of Business Do You Run?
The sort of business you run effects which QuickBooks item is directly for
you. In case you're a specialist, QuickBooks Self-Employed is the undeniable
decision. In case you're maintaining a small business, you'll be looking at
QuickBooks Online or QuickBooks Pro.
Bigger organizations will take a gander at QuickBooks Premier or
QuickBooks Enterprise, contingent upon the number of clients they need.
What number of Users Do You Need?
The number of clients you need will also help figure out which programming
is best for your business. Investigate this graph to see which item suits your
business' size.
Note: This diagram shows the most extreme number of clients available with
every version of QuickBooks, which may cost extra.
Quickbooks Apps
Intuit QuickBooks Online
QuickBooks Online is by far the best accounting and bookkeeping software
for small businesses. I like that you can link it to your bank account. This
makes it easy to use and track money when linked to your business account. It
makes it easy to reconcile the business account and the books. Although there
is so much more to QuickBooks Online.
Just a few of the features within QuickBooks Online include:
Invoicing
Expense Tracking
Inventory Management
Purchase Ordering
Reporting
As your business grows, you can upgrade your account between the top three
tiers. This will allow you to have everything you need for your small
business. Another part that is great about QuickBooks Online is that there are
apps for your phone both through Android and iOS devices. The software is
also compatible with most third-party applications.
QuickBooks Online also offers some of the best pricing. There are four tiers
of pricing, depending on what you need for your business. It also offers a 30day free trial. However, if you want to just jump right into it and go for the
paid versions you will get a 50% discount for the first six months. That means
if you are just starting your business you will have six months to make a little
extra profit and get established before you need to pay full price.
Like most small business, you will eventually have employees that you will
need to pay. With QuickBooks Online, you can add this feature to any of the
top three tiers for an additional monthly cost.
The best part is QuickBooks Online is very user friendly and easy to use. This
software also has a good timesaving feature that you need in any good
accounting and bookkeeping program. It will keep track of due dates for
invoices, sync your business bank account, track your credit card transactions,
and so much more. This allows you to focus more time on the business and
less time on the books while maintaining accurate bookkeeping throughout
your business and giving you a great outlook of the financials of the business.
Another good timesaving feature that puts QuickBooks Online on top is that
you can send out invoices to customers, allowing them to pay online at a click
of a button.
Like with any application, things tend to go wrong with the program itself.
That is why QuickBooks Online offers both phone and chat support. You can
access this from the company website making it easier and quicker to get
issues resolved and have you up and running again without missing a sale.
QuickBooks Online is account approved. This means that no matter what your
needs are you can give your accountant access to your books. Remember, that
your account will not take up a spot in your users that you give access to.
Like all programs there are some limitations, although with QuickBooks
Online it seems like the sky is the limit. The limitations really lay within the
mobile apps. Here are the things you can do with the mobile apps:
Send Invoices
Reconcile Transactions
Take photos of receipts and attach to expenses
View customer information and add new customers
View dashboard data, such as account balance, profit and loss
reports, and open and past due invoices.
After looking through what the app can do, if you feel like that works perfect
then QuickBooks Online is the perfect software for you. However, if you
prefer doing most of your accounting and bookkeeping through your phone,
then there is another accounting and bookkeeping software choice for you.
Xero
If you would rather use a PC or a Mac, Xero has a lot to offer. Xero is by far
the best accounting and bookkeeping software for Mac users. It easy to use
and learn. What I like about Xero are the videos. Everything you do in Xero
will have a video that will help you learn the software.
Xero also has comparable prices and is listed into three different plans. The
starter plan is $9 per month. It does have some limitations. The features of
the starter plan are:
Unlimited Users
Limit to Five Invoices per month
Limit to Five Bills per month
Limit to 20 Transaction Reconciliations per month
The standard plan is $30 per month. This includes:
Unlimited Users
Unlimited Invoices
Unlimited Bills
Unlimited Transaction Reconciliations
Payroll for up to Five Employees
The premium plan is $70 per month. Which includes:
Unlimited Users
Unlimited Invoices
Unlimited Bills
Unlimited Transaction Reconciliations
Payroll for up to 10 Employees. Note: this can be adjusted to
support more employees if needed.
Supports Multiple Currencies. Note: this is a great feature if
you do international business.
The best part is that there are not any long-term contracts for using Xero. That
means you can change at any time without having additional fees. There is
also a free 30-day trial to let you try and find out if it will be the best for your
business.
Much like QuickBooks Online, Xero also has many timesaving features. You
can send out invoices electronically, which also allows for your customers to
pay online easily. You can also turn quotes and estimates into invoices with
only a few clicks. This allows for you to give a customer a quote and if they
agree to go with your services you can turn that quote into an invoice and get
paid.
With your business bank account linked to Xero, the system will allow you to
set scheduled payments and manually pay the bills. This helps save time and
ensures that all bills are paid on time and you do not need to worry about pastdues and late fees.
If you need to claim an expense that occurred, then Xero will help you to
record, manage, claim, and reimburse the expense claims. You can also add
expenses easily and attach the receipt images.
Xero has some great inventory management tools available for small
businesses that do not offer services and instead sell merchandises that are
kept in inventory. Here you can track your inventory and show how much
inventory you have in stock.
As I mentioned with QuickBooks Online, it has limitations when it comes to
mobile apps. Xero is one of these programs that allows for great mobile
accessibility. The mobile app for Xero allows you to:
Create and Send Invoices
Add Receipts
Attach Billable Expenses to Customer Invoices
Submit Expense Reports
Reconcile Transactions
Access your Dashboard for Realtime View of your Cash
Flow
Use an additional app for Employees for Submitting Time
Sheets, Request Time Off, and View Paystubs
One thing that sets Xero apart from other software is that it also has the
capability to have a developer design and customize your own app by
providing the API to allow for integration to your Xero account.
There is also a 24/7 customer support for those times that you have issues with
your account, allowing you to have your books back up without losing the
sale. However, there is one drawback to Xero. There are not many accountant
and bookkeepers who know the software. Therefore, it brings in limitations to
finding someone to keep your books.
Zoho Books
If you are a sole proprietor, freelancer or E-Commerce with a home-base
business, then this is a great bookkeeping software for you. It is easy to use
and affordable. It will allow you to connect with all your accounts and it
covers all the basic needs of your business.
Zoho Books has one of the best customer services and support. The phones
are open 24 hours a day, five days a week.
One disadvantage of Zoho Books is that it does not offer payroll services. If
you have employees than you would need software that is for payroll. If you
do not have employees then this is the best for you and your business.
FreshBooks
I mentioned earlier that there is software for bookkeeping that is great for
those who want more accessibility through mobile apps. What makes
FreshBooks the best is that you can find almost all the features in the mobile
app that you have on the website. Keep in mind, if your business has
inventory then this may not be the software for you.
For each of the plans you can add contractors at no additional cost. However,
if you need to add employees it is an extra $10 per month for each employee.
Contractors and employees can view different parts of the books.
Employees can:
View and Create Invoices and Expenses
View the Dashboard
Generate Reports
Contractors can:
View Projects they have been Assigned to
Track Time towards the Assigned Projects
Create and Send You Invoices for their Time
FreshBooks also has some timesaving features. You can create, send and
manage invoices easily. This can be done from your computer or mobile app.
It also allows for faster payments and makes tracking your expenses easy and
allows for project management and time tracking.
With all software, customer service is a must. You will find both phone and
email support. However, it is not 24/7 support. They do have hours between 8
a.m. to 8 p.m. eastern standard time Monday through Friday. With such great
interface of mobile app then they also have support for those issues that may
arise as well.
Wave Accounting
That brings us to the last bookkeeping software we are going to look at, Wave
Accounting. Wave Accounting is great if you do not have much equity to start
with, as this software is free. Yes, that’s right, I did say free.
Wave Accounting is designed for very small businesses with 10 employees or
fewer and no inventory. If your business offers services, then you may want to
try it out. If you plan on growing your business, eventually you will need to
transition to another form of software.
Keep in mind, what keeps Wave Accounting free is the use of advertising.
That means it will not only post advertising on the software while you use it,
but it will also include its branding on your communications with customers.
You can also add credit card processing for small fee per transaction. The
same goes for payroll processing as this can be added for $15 per month as
well as an additional $4 per employee per month.
Keep in mind, Wave Accounting does still offer the basics for the needs of
your company. With the advertising, if you want to have your business
separated from all the ads, then you may want chose a different software such
as Zoho Books.
How To Choose The Best Quikbooks Version
Every small business operator really wants to keep careful track of expenses
and revenues. The times of the green log ledgers as well as handwritten bills
are more than with the arrival of accounting software and also the personal
computer. But which program is appropriate for you? Are you needing very
customized software or will a plan as Quickbooks job for you? Are you
needing help with the Quickbooks you've actually chosen and installed?
For the majority of business organizations, Quickbooks is an efficient and
capable program, however, not for all. It will do me no great in an effort to
persuade you that QB is perfect for you when it is not. In case you're
consuming LIFO or FIFO to monitor the inventory of yours, QB is simply not
for you. When you do not understand what LIFO or FIFO is, you are not
working with either. If perhaps the business of yours entails a floor plan
financing contract like a furniture store or even a used automobile lot, even
Intuit acknowledges that Quickbooks can't help with which. Right now there
are merely way too many variables that do not fit into the application without'
forcing' some' creative' accounting.
Deciding on the best Software Package
Intuit, Inc, producers of Quickbooks software have a number of packages in
the software line of theirs. You have got the choice of yours from Quickbooks
Simple Start (cheapest) to Enterprise Solutions (most expensive) before
making that purchase you might want to think about an appointment together
with your community Certified Quickbooks Pro Advisor. It can easily be
equally as big a mistake getting started with probably the most costly variant
as it's getting started with the cheapest. Starting out with the least expensive
software program the easy Start enables you to' grow' into requiring a far more
flexible version. But you will find limitations on the easy Start, those
companies with fixed assets or inventory might find dealing with the easy Start
plan very hard. Sure it enables you to do both, but there aren't any subaccounts in the easy Start package. You can't send a copy of the books of yours
to an accountant and also you do not have a total range of reports you are able
to generate either.
Quickbooks Basic
The Quickbooks Basic program is a bit more than the easy Start and can keep
monitor of revenues, expenses, and also be ready to produce several accounts
based on that info. But in case you're monitoring inventory, payroll, and some
additional much more complex accounting then you are going to need to think
about Quickbooks Pro or perhaps Premier.
Quickbooks Online Edition
The newest addition to the Quickbooks loved ones is definitely the internet
version. It's the identical capabilities when the Pro variant below, with the
additional benefits of additional people and appropriate internet access from
several locations. There's month program fee ranging from six dollars to
twenty dollars a month. This particular edition is going to do payroll,
revenues, expenditures but won't do inventory. As of 2008, this specific edition
still can't do inventory. The main drawback of this program is definitely the
continued price each month which I really believe is much more than offset by
the significant advantage that is you won't ever need to update the version of
yours of Quickbooks, you'll constantly get the most recent edition.
Pro Vs. Premier Vs. Enterprise Solutions
Most businesses are able to work with the Pro version, and that is
approximately thirty % under the Premier. When you're not working with
inventory, sales orders or maybe buy orders, the Pro edition will be ideal.
Nearly every service industry is able to work with the Pro package and reap
the benefits of it without any problems. The Premier model is on the bigger
end and also enables you to monitor inventory, purchase orders, backorders,
sales orders, etcetera. Seldom if previously will a company need to make use
of the Enterprise Solutions that are effective at keeping track of 100,000
clients as well as 100,000 vendors with as much as twenty drivers. Enterprise
Solutions is a fantastic package, but there are lots of multi-million dollar
businesses that are doing all right with Premier.
Point of Sale Package
The Quickbooks POS offer is perfect for companies that would like to help
keep good track of inventory and be in a position to get the all-in-one abilities
to have the ability to print bar codes to help you save effort and time on
reordering inventory, product sales, and even cashier instruction. There are
plenty of variables in picking a QB bundle that it will be difficult to list them
all though you have to think about a couple of issues.
Would I like to have the ability to store my accounting info online in case of a
laptop crash?
Just how many individuals will be using the QB of mine at the very same
time?
Can it be on a system, or on specific computers with various users?
Do I anticipate constant growth in the business of mine or will the need
outpace the software of mine?
Calling an expert in the area of yours for a QB Consultation is going to save
you cash! Many QB blunders happen during first setup, and these mistakes
could be too costly to fix, locate a pro to assist you! The majority of businesses
don't make complete use of the QB software program they currently own, just
since they have not been proven just how to put it to use.
Common Terms Used In Bookkeeping And Accounting
Account: A space in a ledger reserved for recording all the transactions of a
specific type. For example, all sales transactions will be recorded in the Sales
account.
Accounting: the practice of entering bookkeeping records into a ledger and
producing financial statements.
Accounting Equation: the accounting equation is Assets = Liabilities +
Owners’ Equity. It is used to ensure that all records in a double-entry
accounting system are balanced.
Accountant: the person responsible for processing and evaluating bookkeeping
records. Sometimes used interchangeably with “bookkeeper.”
Accounts Payable (A/P): all invoices and other expanse that a business has not
yet paid.
Accounts Receivable (A/R): all revenue owed to a company that has not yet
been paid.
Accrual Accounting: an accounting method in which income and expenses are
recognized at the time they are incurred, instead of at the time they are paid.
Assets: all items of value that a company owns.
Bad Debts: sales invoices that have not been paid by customers, and that the
company has written off as an expense.
Balance Sheet: one of three reports that comprise financial statements. The
balance sheet provides information about a company’s value by showing its
assets, liabilities, and equity at a given point in time. The other two reports are
the income statement and the cash flow statement.
Billing: the practice of sending invoices to clients and customers for goods
sold or services rendered.
Bookkeeper: a person trained and experienced in recording all the daily
transactions of a business in journals and ledgers. Sometimes used
interchangeably with “accountant.”
Bookkeeping: the professional practice of recording business transactions in
journals and ledgers according to Generally Accepted Accounting Principles
(GAAP).
Bookkeeping Cycle: a complete cycle of recording transactions before the
records are transferred to the ledger and balanced. Usually a bookkeeping
cycle is one month.
Budget: a fixed sum of money within which a household or business must
function.
Capital: generally, funds or other forms of assets invested into a business to
enable operations.
Cash Accounting: a method of accounting in which income and expenses are
recorded when they are paid, instead of when they are incurred.
Cash Book: the main record of financial transactions for a business.
Cash Flow: the movement or “flow” of cash through a business. A cash flow
statement can show how the business owner manages the money the business
generates through operations.
Chart of Accounts: a list of all accounts contained in a company’s ledger. The
main account categories are assets, Liabilities, Equity, Revenue, Cost of Goods
Sold, and Expenses. Each category may contain several accounts that record
specific types of transactions.
Closing Balance: the final balance on a bank statement or cash book register at
the end of a business day or bookkeeping cycle.
Coding: the practice of assigning transaction amounts to accounts in the chart
of accounts.
Contra: contra accounts allow bookkeepers to counterbalance an entry into a
ledger account. The Allowance for Bad Debts account is a contra account to
the Sales Revenue account.
Cost of Goods Sold: the amount of money a company pays for items they
purchase wholesale and then sale at retail for a profit. This can also refer to the
costs of raw materials to manufacture products for resale.
Credit: bookkeeping entries that are entered on the right side of a double-entry
bookkeeping ledger. Credits increase the value of income, liability, and equity
accounts and decrease the value of asset and expense accounts.
Credit Note: a receipt for money refunded to a customer who was overcharged
or who returned an item.
Creditor: a person or business who lends money or extends credit.
Data: information stored in journals and ledgers.
Debit: bookkeeping entries that are entered on the left side of a double-entry
bookkeeping ledger. Debits decrease the value of income, liability, and equity
accounts and increase the value of asset and expense accounts.
Debtor: a person or business who borrows money.
Deductible: a purchase that can be claimed as a business expense.
Deposit: money paid into a bank account.
Deposit Slip: a receipt showing the date amount of a deposit.
Depreciation: the amount of value an asset loses due to wear and tear.
Description: the section of a financial transaction record that provides
information about the customer and the item purchased.
Docket: a document that provides information about a shipment of items
purchased.
Double-Entry: double-entry bookkeeping requires two entries for every
transaction – a debit entry and a credit entry. Debit entries must always equal
credit entries for every transaction.
Drawings: the owners’ salary.
End of Month: the process that occurs each month when the bookkeeper
completes the bookkeeping cycle.
Entry/Entries: refers to all recorded financial transactions.
Equity: the difference between a company’s assets and its liabilities.
Expense: purchases made to support a company’s operations.
Financial Statements: reports of financial activities that allow businesses,
investors, and regulators to determine the financial health of a company. They
include the balance sheet, income statement, and the cash flow statement.
Fiscal Year: twelve consecutive months that constitute an entire accounting
and bookkeeping cycle. A fiscal year can begin in any calendar month.
Funds: all of the money involved in all of a business’s transactions.
Gross Profit: total business income less the cost of goods sold.
Income: money earned by a business through sales of goods and services.
Inventory: all the items that a company keeps on its premises available for
sale.
Invoice: a document that shows the details of a purchase, including the goods
or services purchased, the date, and the amount owed.
Journal: a chronological record of daily business transactions.
Ledger: a permanent record of daily business transactions organized by
account type. The information in the ledger is taken from the journal.
Liability: debts that accompany owes.
Loan: a sum of money extended to a company or person that must be repaid,
usually with interest.
Loss: Loss occurs when expenses are greater than income. The opposite of
profit.
Net Profit: the result of subtracting the cost of expenses from gross profit.
Nil: a balance of zero.
Opening Balance: the balance of a financial account on the first day of a
financial period.
Payable: a bill that is due to be paid by a business to a customer that has not
yet been paid.
Payroll: the financial account from which funds are distributed to employees.
Petty Cash: a financial account that consists of a small amount of physical
cash, so businesses can make minor purchases.
Profit: the difference between income and expenses.
Purchase: buying goods or services.
Quote: an estimate of the cost of goods or services.
Receipt: a document issued by a business to a customer showing the details of
a sale of goods or services.
Receivable: accounts that are due to be paid to a business that have not yet
been paid by the customer.
Reconcile: matching the calculations or balances from one document to
another, as when someone reconciles their checkbook balance with their bank
statement.
Recurring: a transaction that takes place repeatedly, at a regular time interval,
such as a monthly utility bill.
Refund: money that is given back to the customer or a business after a
purchase as a result of a dispute, an overpayment, or some other reason.
Reimburse: payment in return for some type of loss
Salary: a fixed amount of money paid to an employee for an agreed period of
employment.
Sales: money received for goods or service purchased by customers.
Single-Entry: a bookkeeping method in which all financial transactions are
only listed once.
Software: computer programs like QuickBooks that automate certain clerical
or other tasks.
Statement: reports that display financial information, such as bank statements,
or financial statements).
Transaction: a transfer of funds as a result of a sale or purchase.
Transfer: movement of funds from one account to another, usually for
accounting purposes.
Undeposited Funds: an asset account showing funds that have not yet been
deposited into the bank.
Unpresented: checks that have been written, sent, and received, but not yet
deposited.
Withdrawal: money taken out of a financial account.
Write-Off: an amount of money owed that will not be paid.
Year-End: the financial accounting and bookkeeping activities that occur at the
end of a fiscal year.
The Best Things You Didn't Know
Quickbooks Could Do
QuickBooks is such a rich application it has numerous features that are never
or rarely used, mainly because the small business operator does not take time
to enjoy all these useful capabilities. In this document we're likely to look at a
number of these functions that if used, is of a fantastic advantage to the small
business people. Many of these characteristics are free, several of them call for
a nominal charge to buy add ons, but each one is much cheaper compared to
the market specialized software programs and best of all the, each combines
seamlessly to the QuickBooks data of yours.
1. The Shipping Manager
If perhaps the company of yours does a great deal of shipping with possibly
Fed Ups or Ex, the shipping supervisor is able to integrate the costs of yours
and flow all info in the QuickBooks files of yours. Just click on the produce
invoices answer and also search for the term, "Ship" on the best selection bar
of the invoice itself. You are able to get into the FedEx of yours or maybe UPS
account number and shipping info after, and also utilize this particular
characteristic to plan a pickup, track packages, as well as to print the
destruction of day reports. It enables you to ignore the action of linking to the
Fed Ex or maybe UPS site and can relieve several of the time limitations this
phase places on the business of yours.
2. The Feedback Button
The feedback switch is situated on the key menu icon bar right after' search'.
The modifications which are made each year to correct QuickBooks program
are thoughts that have come from real users of QuickBooks just like yourself.
It's an Intuit rule which the Feedback sent has to be checked out, so whatever
the concept is, Send IT! They get everything from' can I get another color
screen' to' does the chart of mine of accounts truly Need numbers?'
3. Intuit Marketing Tools
Google has teamed up with QuickBooks to let users promote the business of
theirs on Google with the QuickBooks application. Generally, the offer is fifty
dollars of free PPC marketing for your company. Google will likewise allow
you to promote your services or products online by adding the business of
yours to Google Maps. Clicking on the Google icon is going to take you to a
site where it'll point you to Marketing more, ideas, and tips! Paying out for the
per click marketing has turned into just a little overdone internet, for that
reason the moment you've achieved your fifty dollars, I'd suggest ceasing this
particular promotion. You will find methods to advertise your company using
online search engine websites without spending on it but that's info for one
more article.
4. The Loan Manager
In order to locate the mortgage supervisor, you have to click the assist element
and enter the' loan manager' to begin to use it. This particular software enables
you to get into in all the debt of yours, long and short term, with the interest
rates as well as payoff amounts. Next, you are able to test out various monthly
payments to see how quickly you are able to pay off the debt the company of
your owes. The debt of yours could be significantly reduced by just paying
twice a month rather than when a month. This feature is going to allow you to
strategize the absolute best scenario that you can get out of debt fast.
5. Third-Party Solutions
QuickBooks works with many diverse types of software programs. The place
to find it's at the Marketplace website on Intuit's primary site. The 3rd party
solutions page has Industries that have needs that are unique. Construction
companies for instance, often use sort software for estimating expenses, and
can have different software needs than the Professional or retail industries.
6. Electronic Payments Sent Through QuickBooks
Generally I dissuade folks in the training classes of mine from downloading
info into QuickBooks; this may lead to a few issues in case the info isn't
formatted based on QuickBooks requirements. Nevertheless, for all those
entities which are able to take electronic payments, the small business operator
can easily produce the parameters to electronically spend these payments, all
info moves into the system and you will find fewer transcriptional mistakes
made.
7. Customer Manager
Lots of business people with over a hundred customers have bought a system
known as Act which retails at approximately 1dolar1 300. The buyer Manager
is seventy dollars off of an associate site and can do what Act will do. It will
keep track of every interaction (phone, letter, or email calls), each document
(invoices, sales letter receipts, etc) along with every office or maybe project
related to that client. Additionally, it keeps track of the referrals of yours,
customer history, pictures and scans.
8. QuickBooks Merchant Service along with Online Web store
If perhaps you have got a webshop for the business of yours that was not set
up via QuickBooks, odds are you paid much more for the setup as well as
maintenance. QuickBooks has arrangements together with the best online shop
generators that will enable you being open 24/7 on the internet and also have
all of the info flow into QuickBooks while you're away. The firms that
QuickBooks uses are: Go Daddy, Homestead, Network Solutions, ProStores
(EBAY), and Website Pros. together with the seamless integration of the
merchant services account of yours and the internet web store, you are able to
rest assured that the business of yours continues customers, or operating are
able to continue paying you, even when you're closed, or on holiday.
9. Gift Cards
For all those Point of Sale computer users, they might stop being mindful
which they are able to create Gift Cards that are special to the business of
theirs. Figures indicate that upwards of sixty % of all gifts during Christmas
are Gift Cards to different shops. That is cash in the pocket of the small
business operator that can't be utilized in another store! A gift card represents
cash solely to the business of yours to ensure you are able to today be on the
level playing field with the bigger retailers who could provide gift cards of any
denomination to almost all the customers of theirs.
10. Paper Manager
The Document Manager is an element of the customer management system
that is available individually. This particular function enables you to check as
well as maintain all copies of invoices sent to help you and also filed under the
person clients or even vendors. Most of these scans are out there for you with
the touch of a switch or click of a computer mouse therefore all those filing
cabinets start to be out.
11. Additional tip
With all these scans, files and much more kept on your hard disk it's more
critical than ever to use a back up of the information of yours that's
immediately available to you. Intuit provides an internet backup service for the
hard drive of yours for 1dolar1 149.95 a season. It's complete and can do
everything you have to have done. Nevertheless, as convenient and complete
as that's, there's a good option available that for 1dolar1 50.00 annually will
back up all on the hard drive of yours from QuickBooks data as well as music,
to documents, everything and pictures else. This particular service is called
Carbonite and it is placed on that companies' site. I have had a lot of customers
lose important details to viruses, Trojan horses, and worms to take it easy and
also let them not back up the data of theirs.
Conclusion
QuickBooks needs one system administrator password and another
one for payroll related services. You can keep these as two different ones, in
case you need to give your CPA access to run payroll
If you have worked in ERP systems, you have to close each
application or screen by clicking the close or x option. In QuickBooks you
can just press escape (ESC) to close the screen.
The days of you using calculator are over. You don't have to use the
one in your smartphone either. In any amount field you can use
mathematical signs like plus, minus, divider etc and do the basic
calculations.
If you're not an accounting expert, you don't have to re-format any
reports for your accountant. You can generate accountant reports from the
report tools and generate PDF format directly. There is no need to take your
computer to your accountant(in case sole owner type business).
You're in a hurry but just want to know the snapshot of the business
without running any reports. Click on the Insights next to home page. Quick
books presents a nice dash board like a CEO view.
QuickBooks quick add feature is very powerful. You don't have
enter all the vendors and customers in the beginning. As you get business
work, you can add them quickly from the transaction itself.
Backups: There is online back up option as a subscription. You can
opt for local backups and the software reminds your periodically. After
backup, it prompts you to delete the previous third from the last one.
QuickBooks saves all the reports submitted to Government. Ensure the
folder is right for those auto-saves. Periodically take back up of these
reports as well.
Start using Snapshots feature which auto-generates graphical
representation on your company, payments and customer receipts. This
visual tool is very effective to review the company performance quickly
without the need of detailed reports.
Do you keep to-do list in excel or as calendar appointments?.
Instead of flipping back to your other software applications and
QuickBooks, you can store them within QuickBooks. Under company
menu>to-do list. To add, click on the drop down list on the bottom. Similar
feature available for reminders too.
Another way to do things on time: Based on the known end dates for
pay roll taxes and estimated tax payments, Quickbooks puts those alerts in a
single page. Company>alerts. This gives you an idea to plan your work
ahead.
Your tax accountant will always tell you to go out on New year eve
to note down the mileage in your vehicle(s). You don't have write it down in
a piece of paper and search after few months. QuickBooks helps to enter
your vehicle mileage under company menu and save it. This feature is most
effective in case you need to track miles used in project related work and
export for reporting.
Is there a cloud version of QuickBooks available?. QuickBooks
online is the web version where multiple users can work on the transactions
like ERP system. (ERP-Enterprise resource planning). The look and feel
will be different since that is a single platform for multiple companies. You
can run reports and download them to your local computer. You may have
to check with the vendor whether interface to tax reporting software is
available. If you desk-top version, your tax reporting software can open
QuickBooks and import the data very quickly.
For large volume transactions, especially on the banking side,
QuickBooks offers bank reconciliation option. You can enter beginning and
ending balance per period from your bank statements for QuickBooks to
reconcile the transactions. There are also advanced bank feed options where
you get the file from the banking institutions for reconciliation.
If you employ contractors and need to generate 1099 for them,
QuickBooks can do that as well. There is a 1099 wizard which will guide
through the process of identifying the vendors and generating the 1099s in
print or E-file mode.
You can manage basic inventory transactions by having your
product or SKU list within QuickBooks. This is not to replace advanced lot
management or cycle count capabilities that may exist in conventional ERP
system.
The recent software releases have UPS/FEDEX shipping label
creation options. There is no need to wait in line at the counters to generate
the labels for your shipments.
QuickBooks is a more comprehensive financial accounting
software. There are more features and useful tools within the module. For
advanced training. Quickbooks offer two day hands-on training in major
cities. You can even get product certified to advise other companies and
professionals.