Category Archives: Financial Statements

FIVE BASIC TAX TIPS FOR NEW BUSINESSES

business-owner-stockxpertcom_id17260461_jpg_9d244c0f32209ba041e058fccd912e101If you start a business, one key to success is to know about your Federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure.  As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company (LLC). You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method.  An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

If you would like to start a new business or have questions about starting up a new business, please call our office today. We specialize in helping people just like you who want to enjoy the freedom and flexibility of owning their own businesses.

Source: IRS Summertime Tax Tip 2014-09

TWO IMPORTANT LIQUIDITY RATIOS TO KNOW FOR YOUR BUSINESS

currentratioDo you know what the current ratio is for your business?  How about the quick ratio?  These two ratios are considered important liquidity ratios, or ratios that will give you an idea of how well you can meet your debt obligations. These two ratios are critical because if your business does not have liquidity, then it won’t be able to pay its liabilities. Also, the business may not be able to handle an unexpected expense.

The Current Ratio is the total of current assets that your business owns (ex.-cash and cash equivalents, accounts receivable, inventory, etc.) divided by current liabilities (ex.-accounts payable, taxes payroll, debt obligations due within the year, etc.). This ratio shows whether the assets that you own can be converted into cash within a year in order to pay off your liabilities that are due within a year. A ratio of less than one means that you could run short of cash within the year unless additional revenue is brought into the business.

The Quick Ratio is similar to the current ratio; however, inventory isn’t included in the calculation. The quick ratio is expressed as cash and cash equivalents plus accounts receivable divided by current liabilities. Inventory isn’t include because it may be difficult to turn over the inventory within a year.

Both of these ratios should be analyzed together to help you calculate how well your business can meet is debt obligations.

QUICKBOOKS REPORTS THAT YOUR BUSINESS SHOULD RUN REGULARLY

qbgraphYou send invoices because you sold products and/or services. Purchase orders go out when you’re running low on inventory, and there are always bills to pay, it seems like. All of this activity is, of course, important in itself, but all of your conscientious bookkeeping culminates in what’s probably the most critical element of QuickBooks: your reports.

Reports can tell you how many navy blue sweatshirts you sold in March, what you paid for health insurance premiums in the first quarter, and how much you bought from your favorite vendor last month. They’re very good at drilling down to get the precise set of numbers you need.

But carefully customized and properly analyzed reports can do more than tell you how many golf clubs to order and when it’s time to switch phone services. They can help you make the business decisions that will help you take your growing company to the next level. There are several that you should be looking at regularly, some of which you can interpret easily and use in your daily workflow. We’ll help you with the interpretation of the more complex financial reports.

Who Owes Money?

That’s probably a question you ask yourself every day. You don’t necessarily have to run the A/R Aging Detail report every day, but you’ll want to run it frequently. It tells you who owes you money and whether they’ve missed the due date (and by how many days).


Figure 1: By running the A/R Aging Detail report, you can see whether you need to follow up with customers who have past due invoices. 

As with any report, you can modify it to include the columns, data set and date range you want by clicking the Customizebutton. When you create a report in a format that you think you might want to run again, click the Memorize button. Enter a name that you’ll remember, and assign it to a Memorized Report Group.

Getting There

There are two ways to find the reports you want to see. You can open the Reports menu and move your cursor down to the category you want, like Customers & Receivables, which will open a slide-out menu of options there.

Or you can open the Report Center, which lets you explore reports in more depth. Each is represented by a small graphic with four icons under it. You can:

  • Run the report with your own data in it
  • Open a small informational window
  • Designate it as a Favorite, and
  • View QuickBooks help.


Figure 2: If you access QuickBooks reports through the Report Center, you’ll have several related options. 

Other accounts receivable reports that you should consult periodically include Open Invoices and Average Days to Pay.

Tracking What You Owe

Reports can also keep you up-to-date on money that you owe to other people and companies. An important one is Unpaid Bills Detail, accessible through the Vendors & Payables menu item. Though you can modify its columns, this report basically tells you who is expecting money from you, the date the bill was issued and its due date, any number assigned to it, the balance due, and relevant aging information.

Vendor Balance Detail is critical, too. This report displays every transaction (invoices, payments, etc.) that contribute to the balance you have with each vendor.

Standard Financial Reports


Figure 3: We hope you’ll let us help you by running and interpreting these standard financial reports. 

QuickBooks report categories include one labeled Company & Financial. These are reports that you can run yourself, but they’re critical for understanding your company’s financial status. We can customize and analyze these for you on a regular basis so you’ll know where you stand. They include:

  • Balance Sheet. What is the value of your company? The balance sheet breaks out this information by account (under the umbrella of assets, liabilities and equity).
  • Income Statement. Often referred to as Profit & Loss, this shows you how much money your business made or lost over a specific time period.
  • Statement of Cash Flows. How much money came in and went out during a specified time range?

Reports can only generate information about what you’ve entered in QuickBooks and exactly where it’s been entered. So it’s crucial that you follow standard accounting practice as you proceed through your daily workflow. As a CPA and Advanced QuickBooks ProAdvisor, I’m available to answer questions that you have about entering your information in QuickBooks and getting the reports that you need to make wise financial decisions. The future success of your business depends upon it.

CLOSING YOUR BOOKS ON THE FIRST HALF OF 2014: NOW WHAT?

closingthebooksJune 30 is the end of the second quarter in 2014 for most small businesses that operate on a calendar year; July 1 starts the third quarter. Now is the time to assess your results year to date, reassess your projections for the remainder of the year, and put your plans into action.

Assessing results
Has the first half of the year been profitable, or as profitable as you’d hoped? The only way to know is to review your revenue and expenses to date. Compare the results with your expectations from your business plan. What the results mean:

  • If you hit your target, congratulations! You’ve obviously got a good handle on your sales, and expenses haven’t exceeded your budget.
  • If you exceeded your target, determine the reason or reasons why. You must be doing something right and you need to identity this so you can capitalize on it going forward. Did new marketing efforts pay off? Did you implement new technology that significantly cut costs?
  • If you fell short of your target, determine the reason or reasons why. Was revenue too low? Were expenses too high? Did you experience an unusual event, such as a catastrophic storm?

Projecting revenues and expenses
Take the lessons you’ve learned from your assessment, couple that with expectations about customers and expenses, and devise new projections for the balance of the year (or longer).

  • Revenue side. What are you doing to retain customers? Find new customers? Are you seeing any changes in customer buying habits? Quantify your revenue projections based on what you know about your customers specifically and the market in general.
  • Expense side. Look at your expense budget to uncover potential cost increases. For example, if your current health plan is up for renewal, find out if possible what the new premiums will be. This will help you decide what to do about health coverage in light of the new cost and the rules under the Affordable Care Act.

Actions to take
Planning is not merely a cerebral activity. There are actions you can take now:

  • Update your business plan. If you don’t have a formal plan, consider creating one (even if it’s only one page). This will serve as a roadmap that you can follow in the coming months to try to meet your projections. It will also serve as a benchmark against which to assess your efforts at the end of the year. The business plan includes your budget (a discussion of which follows), your marketing efforts, strategic planning, and more.
  • Review your budget. As part of your business planning, you’ll need to check your pricing and see whether changes are warranted. If you’ve experienced price increases in your monthly expenses, you may want to pass on some or all of this to customers; your margin can handle only so much. Also look over your expenses to see where changes can be made. Take advantage of technology to trim expenses (e.g., use videoconferencing instead of traveling distances to customers and clients).
  • Meet with your tax advisor. Now is likely a slow time for CPAs and a great time to meet with yours to discuss tax issues for you and your business. Make sure you’re taking advantage of opportunities that can reduce your tax payments and implement best practices for your company.

Conclusion
You can’t run a business by crossing your fingers and hoping for the best. Realistic planning and follow-up will go a long way in helping you to grow your business, handle disruptions, and achieve your dream.

Written By: Barbara Weltman, Big Ideas For Small Business

Source: http://www.barbaraweltman.com/articles/financial/financial_article_details.asp?id=268

ACCOUNTING CONCEPTS THAT EVERY BUSINESS OWNER SHOULD KNOW

confusedYou may have just opened your business, but your business is D.O.A. without an understanding of accounting and recordkeeping requirements. Here’s a primer of twenty accounting concepts that every business owner must know: 

#1: Account Types

There are six Account types that are used in every business:

Asset – An item that your company owns.  Current Assets include those items that can be converted to cash within one year, such as Checking and Savings Accounts, Inventory, and Accounts Receivable.  Fixed Assets include those items that are not expected to be converted to cash during one year of normal business operations, such as Loans Receivable, Machinery, Equipment, and Furniture and Fixtures.

Liability – A debt that your company owes.  Current Liabilities include Accounts Payable, Credit Card Liabilities, Sales Tax Payable, and Payroll Taxes Payable.  Long Term Liabilities include Loans Payable, Notes Payable, and Mortgage Payable.

Equity (or Capital) – The net worth of your company.  Equity comes from two sources: money invested by owners or shareholders, and profits and losses earned by your business.

Revenue– Money that comes into the company and earned from sales or services.

Cost of Goods Sold – The cost of goods and materials held in inventory and then sold.

Expense – Money that is being spent by the company on business-related items.

#2: Financial Statements

There are two Financial Statements that are important to every business.

Balance Sheet – A report that summarizes the financial position of your company.  It shows the value of your company’s assets, liabilities, and equity as of a specific day.  It is called a Balance Sheet, because the value of the Assets is always exactly equal to the combined value of the Liabilities and Equity.

Profit and Loss Report – A report that summarizes your income and expenses for the month,  so that you can tell whether you’re operating at a profit or a loss.  The report shows subtotals for each Income or Expense account that has been set up.  The last (bottom) line shows your Net Income or Net Loss for the month.

#3: Petty Cash

A signed and approved petty cash voucher is always needed in order to reimburse the Petty Cash Fund. When a check is written to reimburse the Petty Cash Fund, the account number(s) to use for the expense account distribution should be all the expense account numbers and amounts based on the petty cash receipts.   Ex.-“Office Expense” $49.16; “Auto Expenses” $14.75; “Meals”  $36.09.  These three individual expense accounts should be listed as the expense accounts, and not Petty Cash.

#4: NSF, Credit Card, and Misc. Fees

These fees are often overlooked and are not subtracted from the company’s checkbook balance.  When they aren’t subtracted, the checkbook balance is incorrect and you may run the risk of overdrawing your account by writing checks and not having sufficient funds to cover them.  These fees should be recorded immediately as deductions in the bank account register.

#5: Purchase of Machinery, Equipment, and Furniture

Those specific items that will be used by the business for over one year should be coded to the specific asset account entitled “Machinery,”  “Office Equipment,”  or “Furniture and Fixtures.”  They should not be coded to the expense accounts entitled “Office Expense,”  “Repairs and Maintenance,” or  “Shop Supplies” etc.  The bottom-line invoice amount (which includes sales tax and possible delivery charges) should be entered.

#6: Year-End Bonuses

Payroll taxes such as Federal Withholding, Social Security, and Medicare must be withheld from the gross amount of the bonuses.  If you’re in doubt as to what should be the gross amount for, let’s say, a $100 net bonus check, please call us before you write the check.  When we discover that you didn’t withhold payroll taxes from a bonus check, we’ll have to calculate the taxes for you.  You’ll then end up paying the IRS both the employer’s and employee’s portion of Social Security and Medicare tax, which can be avoided.

#7: Loan Payments

When you write a check for a loan or note, the amount paid must be distributed to two accounts—for the loan principal (a liability account) and for the loan interest (an expense account).  The breakdown for these two amounts should be listed on a separate amortization schedule.  If you don’t have this schedule, please call the lender or your CPA. The loan interest is deductible as an expense on your Profit & Loss statement but the loan principal amount is not deductible on your Profit & Loss statement.

 #8: Payroll Tax Payments

When coding the check written for the monthly Form 941 payroll tax deposit, either the account “Payroll Tax Deposits” or else “Payroll Tax Liability” should be used.  Both of these accounts are liability accounts. Payments should never be coded to “Payroll Tax Expense,” an expense account.  (For QuickBooks users: Use the “Pay Payroll Liabilities” feature).

 #9: Credit Card Payments

When coding the check written for the credit card payments, individual expense accounts should be used for the specific items charged – ex. Office Expense, Meals & Entertainment, Repairs & Maintenance, etc.  Personal items charged should always be coded to the account “Distributions” (S Corporation)  or  “Shareholder Loan” (C Corporation).

 #10: Sales Tax Payments

When coding the check for the payment of sales tax liability to the state, the account number for the account “Sales Tax Payable,” a liability account, should be used.  Do not code these payments to “Sales Tax Expense,” an expense account.  (For QuickBooks users: Use the “Pay Sales Tax” feature).

 #11: Checks Written For Personal Expenses

Since these expenses are not business expenses, business expense accounts should never be used.  Instead, these personal expenses should always be coded to the account “Distributions” (if your company is an S Corporation)  or “Shareholder Loan” (C Corporation).

#12: Retained Earnings

Never code any Checks or Deposits to the “Retained Earnings” account.  This account should never be used in a transaction, unless your CPA gives you end-of-the-year journal entries to make that will increase or decrease the “Retained Earnings” account.

 #13: Miscellaneous Expenses

Don’t code any check amounts to “Miscellaneous Expense.”  This is a “hot” item for potential IRS audit.  You may need to create a new account for the specific item.  If you’re unsure of where to code this item, please call your CPA.  It’s always better to be “too specific” than to be “too general.”

 #14: Consistency in Recording Expenses

Always be consistent when coding a specific expense amount that could be considered to be ambiguous.  For example, when you code a check to pay for auto insurance, be consistent in either using the “Auto Expense” account or else the “Insurance” account.  The choice is up to you, but it’s important that you continue to use whatever account that you choose for all other subsequent checks to pay your auto insurance.  Another example where you should use consistency is in recording fees for printing checks.  Be consistent in coding the check to either “Bank Charges” or else “Office Expense.”

 #15: Recording Deposits

When deposits are recorded, be sure to only code receipts from customers as Sales Income.  Any other amounts received should be coded to their specific individual accounts.  For example, amounts put into the business from shareholders should be coded to “Shareholder Loan” and not to “Sales.”  Amounts received as refunds, rebates, loan repayments, etc. should be coded specifically to their specific account.

#16: Recording NSF Checks

If a customer’s check bounces in the current accounting month, then void the customer’s check payment.  However, if the customer’s check bounces in an accounting period following the accounting period that it was recorded as a payment, these steps should be followed: (1) Record the bank charge for the NSF check in the checking account register, (2) Record the NSF check in the checking account register.  Enter the customer’s name as the Payee, the amount of the NSF check in the payment column, and either Accounts Receivable (accrual basis) as the Account to be debited.

 #17: Recording Bad Debts

If a customer’s account becomes uncollectible in the current accounting month and the original sale was recorded in a prior accounting month, a credit memo should be prepared for the specific customer to reverse the customer’s invoice(s).

#18: Non-Deductible Expenses

There are a few business expenses that aren’t deductible when preparing your corporation’s income tax return at the end of the year.  These expenses should be tracked separately and include: (1) Penalties paid to the IRS (not Interest, which is deductible). (2) Business gifts over $25 per person per year.  These non-deductible expenses need to coded to an expense account called “Non-Deductible Expenses” and should be clearly defined as to what they are for.

#19: Vendor Payments

All payments to vendors for services for $600 or more must be tracked because a 1099 form must be given to them in January of the following year.  Be sure to separate amounts paid for services rendered as opposed to amounts paid for reimbursements, materials, or supplies.

#20: Voiding Checks

All checks should be entered in the account register—whether they’ve been used or unused.  Be sure that the monthly numerical sequence of checks is accounted for by including all voided checks and checks held but not yet released.  These checks should be recorded with zero amounts until they are released.

If you’re still confused, don’t panic — call our office today at (727) 391-7373.  We’re only a phone call away.