Four Keys to Clarity in Accounting Systems

Contrary to popular belief, accounting systems are not static. Nor are they the same for all businesses or even all businesses in the same industry. Those ideas imply that there is something about accounting that is required, but not useful - stiff, stifling, and boring. Like high school English.

Accounting is optional. You do have a choice about whether or not to do it.

I have met and worked with plenty of people who don't pay attention to their finances and find checks bouncing off the walls. It's a great place to start.

From Dictionary.com: Accounting is...

1. the theory and system of setting up, maintaining, and auditing the books of a firm; art of analyzing the financial position and operating results of a business house from a study of its sales, purchases, overhead, etc.
2. a detailed report of the financial state or transactions of a person or entity: an accounting of the estate.
3. the rendering or submission of such a report.

Accounting is how you get detailed information about your financial position. You can only do that if it's set up and used to get the information you need.

There are four keys to getting the most out your accounting system so that gives you what you need for decision-making:

• Accuracy
  
• Consistency
  
• Reporting and
  
• the Chart of Accounts

Accuracy is the first most important thing to ensure in your system. In fact QuickBooks and other pre-packed software systems have a function called reconciling that helps you find discrepancies. If you don't have the right numbers, you can't get accurate information.

The second is consistency. It's more important that most pieces of accounting: if you don't update consistently, you don't have accurate information and you can't do other important things like reporting. Consistency is also important for another reason, like brushing your teeth. It's improves your current and if you do it regularly it improves your long-term health. It is an investment in the future of your business.

Reporting is the function that aggregates (or puts together) all the information that you've been entering and gives it to you in one neat little package for easy reading. If you are entering the information consistently and accurately, these reports can give you up to the minute information about your money that even the banks don't know - that's exciting! Reports are what moves you beyond bookkeeping as a chore to using accounting for management decisions, budgeting, hiring, expanding, and so on. Reporting rocks!

The last piece we'll touch on today is your chart of accounts. That's the place where you find the categories of transactions that you use (which is another basis for reporting). Some of them like "postage" or "printing and reproduction" are about expenses and seem straight forward and the easiest for people to understand.

I find that people get into trouble in two main places in their accounting: categorizing/understanding income and balance sheet accounts. Assets, liabilities and equity seem to confound people regularly to the point where they give up and stop doing accounting all together. Understanding those pieces will make your accounting a lot easier. If you don't understand them either do your homework or hire someone to help you set these accounts up and teach you how to use them. This, in my experience is a critical piece of a business and deserves the time and dollars you put into it. In fact I find that as a bookkeeper and accounting consultant, having this piece in order makes the other pieces both possible and likely to get done. Having clarity here creates a place for people to take action from.

I think accounting can be a lot of fun. It can also be a function of your business that really supports and informs your decision making and growth. It's up to you to keep it healthy and vibrant.

Enjoy!

6 Ways to Take Money Out of Corporation

One of the bigest confusions I see in corporate bookkeeping is how you can take money out of the corporation. So I've complied a very basic list for us to refer to.

(1) Repayment of a loan to the corporation. This is not taxable to the stockholder. The stockholder should have reported interest earned and the corporation should have taken an interest expense deduction.

(2) As dividends paid by the corporation. Dividends are profits split among the shareholders proportional to the number of shares each stockholder owns. For example, a company has $100 to pay in dividends, if one stockholder owns 40% of the stock, he should receive 40% of the dividends or $40. See dividends for more information on them.

(3) By selling some of his stock back to the corporation. This becomes Treasury Stock to the corporation (as opposed to Common Stock) and is not taxable to the sharehold if he receives the same amount per share as the amount per share for which he originally bought the stock.

(4) As salary. The salary amounts are not dependent upon the number of shares owned. For example, if two shareholders each owns 50% of the outstanding stock, it is not necessary that each get identical salaries. Bonus payments would also fall under this category. This is taxable as payroll and the corporation must pay liabilities on the amounts paid.

(5) Theft or embezzlement. This is taxable to the shareholder as he is caught.

(6) As a loan from the corporation. In this case there should have been loan documents drawn up and signed by both the stockholder and a corporate officer. The corporation will record periodic interest earned and the stockholder may be able to take interest paid as a tax deduction.

There's abunch of other things that people think they can take out of a corporation, but they can't. Partner "draws" are one of those things.

Reimbursements are not wages or money taken out, they are corporate expenses being paid in advance by an individual. So the reibrusement is not taxable and does not fall into this category.

Please note: this is a beginning only. This does not create a reliance of any kind.

Accounting terms - debit and credit

There were two specific terms that were challenging for me because them mean different things are different times - or so it seemed.

You see a debit is an accounting entry which results in either an increase in assets or a decrease in liabilities or net worth. Opposite of credit.

Where as a credit is the opposite.

But when you look it up the definite says nothing about accounting entries. It talks about consumer credit and lines of credit. So when the banks loan you money, they see an increase in assets (especially because they've been lending on a 1:40 ratio). A credit is an increase in liabilities - for you. So while you receive cash, you're worth less money because of it.

Interesting no?

An affirmation to work with around credit and debt: My debts represent my and other's belief in my future earning potential.

Beginning with a new Bookkeeper: Documents and Information

Happy New Year!

People often decide that they want to start with a new bookkeeper in the new year. After deciding on who, and where and for how much,  the next big question is:  what do I need to give my shiny new bookkeeper in order for us to work together?

I've put together a list of documents that you'll need in starting with a new bookkeeper. Keep in mind that you'll need these document as of the date of either the opening of the business or the date of beginning the new records (whether you're choosing QuickBooks, Quicken, Excel, or doing the books by hand you'll have to choose a starting date).

• Checkbook stubs or checkbook register with vendor names, dates, and amount information.
• Business bank statements (checking, savings, etc.) 
• Business loan information (lines of credit, personal loans/equity, asset purchases, etc.)
• Copies of deposits including descriptions of income
• Business credit card statements
• Business expenditures made with personal funds (check, cash, credit card)
• Subcontractor/vendor information (name, address, taxpayer’s identification # either EIN or SSN)
• Customer/client information (name, address and how much they owe you) 
• Business taxpayer’s identification numbers (federal & state)
• State & Federal applications for filing online payroll taxes
• Employee information for payroll tax returns
• Federal and state tax returns for previous year's filing, if applicable
• CPA, tax attorney or tax professional's contact information, if you have one

A note about QuickBooks and downloading transactions. Many people want to be able to download transactions into QuickBooks or Quicken or some program.  To do that you'll have to talk to your bank and make sure that your bank has that functionality with the type of account that you have and that you're set up to do that. Many banks won't allow you to download QuickBooks formatted transactions from personal accounts and these days there are often fees for the privilege - I've seen them up to $16/month. 

Usually you need a separate pin for the software to access the bank's website and sometimes a specific log in to access the transaction. Sometimes you'll need to import them as you can't download them directly and sometimes you can just click one or two things and make it happen. There are time limits to how long the transactions remain on the bank's website as well (usually three months, but American Express seems to have an entire year's transactions for download and have been the easiest to work with). 

In any case, there are many answers to this question. So be prepared. If you want this feature, either let your bookkeeper know in advance or be prepared for it to take some weeks to have this set up as the pin in generally mailed to you.

Additionally downloading transactions doesn't always save time. The professional will have to review each and every transaction that goes in regardless of whether they are downloaded or entered manually. And if you're downloading transactions, you're trusting the bank's word on your transaction.