Accounting Articles

Beyond Taxes - How Your Profit & Loss Statement Can Help You Run Your Business

2008-11-23T18:29:00.002-08:00

You would be surprised how valuable your Profit & Loss Statement is and how it can help you manage your business. It can show you if you material, labor or administrative costs are too high or too low. It can also show you the trend in your business so that you can capitalize on favorable trends and mitigate negative trends. And finally, your Profit & Loss Statement can provide the foundation for creating a budget and truly enable you to get control of your costs.

Most small-business owners think of their bookkeeping as a necessary evil that is useful only for the preparation of tax filings. But your Profit & Loss Statement is much more than that. Comparing the current year financial activity to the prior year can tell you how your business is progressing - whether the trends are headed up or down. If they are headed up then you can expand on what you are doing right. This will increase your profits and make your business stronger. Conversely, if the trend lines are heading down, you can identify what is causing the negative trend and then make changes to rectify the situation. Maybe your quality is slipping or your vendors are causing delays in the production cycle. Whatever the problem, by figuring out what is going wrong, you are sure to improve your business.

Another useful tool is calculating costs as a percentage of sales. This calculation will tell you if your material or labor costs are too high and show how your selling and administrative expenses are tracking against sales. Costs that are too high will eventually put you out of business. But costs that are too low are a real danger too. It could indicate a decrease in product quality or reduced customer service.

By digging a little deeper you can identify which product lines are most profitable. It might surprise you that a product receiving little attention has a great gross profit. That is your starting point for a marketing program to push a product with low sales volume but great gross profit potential.

Your Profit & Loss Statement is also a useful tool for creating a budget. Once you have identified your sales streams and costs, you can estimate what those items will be next year. It might surprise you that a small increase in sales without a corresponding increase in costs can have a dramatic positive effect on the profitability of your business. At the same time, increased costs without a corresponding increase in sales can cut deeply into the profitability of your company. This is especially true of labor costs which are often the highest cost in a business.

So take a few minutes and look at your Profit & Loss Statement. Compare it with last year and see how your business in progressing. Then look at those percentages to see if your costs are too high or too low. You will be surprised at how much valuable information is available just by reading your Profit & Loss Statement.

Linda Dawson is a Certified Public Accountant with more than 25 years experience helping small and start-up businesses. Dawson & Associates has just introduced their latest service, the Virtual Accounting Office. Learn more about this exciting new product at http://www.MyVao.com.

What is the Single Most Important Thing to Learn in Business? Accounting

2008-11-23T18:29:00.001-08:00

If you ask a business person, entrepreneur or executive what the most important thing in business is they are likely to tell you; people, sales, capital or a product and service that people desire. Sure, those are important, but they often miss accounting.

A company with a sharp pencil, which knows where it is at, at all times, is more likely to make money, have a better cash flow and grow the business over a long period of time. A company that is weak in its accounting has a greater chance of business failure in the first 5-years and no company; small, medium or large is exempt.

If you are a small business person and you feel as if there is more to know, then why not register and take some accounting classes at the local community college level? If you are an entrepreneur, then you need to understand how to create realistic proformas, how to attain money and how to insure your cash flow is strong so you can start, grow and succeed in your entrepreneurial endeavors.

Flying by the seat of your pants in your own business and juggling all the finances is fun and exhilarating, but as the business grows larger and larger it's time to either hire an accountant or learn how to do that part of it also. Not only will good accounting help you make better business decisions, but it will also keep you from going to jail for making a mistake on your taxes, withholding or misstating your income. I sincerely hope you will consider all this as you seek to increase your knowledge of business accounting.

"Lance Winslow" - Lance Winslow's Bio. If you have innovative thoughts and unique perspectives, come think with Lance; http://www.WorldThinkTank.net/.

Accountants - How They Can Help Your Small Business

2008-11-23T18:28:00.002-08:00

Do you own a small business? If you do, you need an accountant. Many small business owners think they can handle their financial matters all by themselves. As far as they're concerned, big corporations like Fortune 500 companies need accountants, but they can take care of their own needs in that area. This is a big mistake for any business owner to make, and it will cost you money in the long run.

While it may be true that you've got a fairly good handle on your business numbers, it's highly unlikely that you could do anywhere near as good a job as professional accountant could do for you. If you bake bread, that's what you should focus on. Carpet cleaners should concentrate on doing the best job cleaning carpets they can. And the time you spend taking care of your books could be better spent getting more customers, or managing your client list. Spending hours a week or several hours a month is not a good use of your time. An accountant can free you up to make more money by not having to worry about the tedium of bookkeeping.

A good accountant can also show you leaks in your business. Maybe you're spending too much money each month on a certain form of advertising. An accountant figure up how much return you're getting on each form of advertising and tell you which ones are working and which ones are ineffective. This can have a huge effect on your bottom line.

And taxes? Forget about it! Every business owner dreads quarterly tax filing season, and it can be a nightmare for a small business that's just getting off the ground. And if you're growing by leaps and bounds, keeping up with all the paperwork to do your own taxes can drive you bonkers. Let a pro handle that stuff.

An accountant can free you up to do what you do best, can show you ways to improve your profits, and can make sure you've got all your ducks in a row when it comes to your dealings with the IRS. Every day you go without an accountant for your small business is another day you're losing money.

Rocket City Local is the Huntsville, AL directory people turn to first. Check it out today to find a Huntsville, Alabama accountant

Top 7 Tips For Solicitors - Bookkeeping

2008-11-23T18:28:00.001-08:00

Solicitors' accounts can be a minefield. Solicitors have enough on their plate without the additional stress of trying to remember and apply all the Solicitors Accounts Rules (SARS) that exist, and so for this task, they may well rely on their Legal Cashiers. In this article, we attempt to outline the top 7 tips that all solicitors should know when it comes to Legal Accounts.

1. Purchase invoices/counsel / expense receipts must be retained for VAT purposes.
It doesn't matter what the amount is, any expenses need to be supported with a receipt. If a vat inspection took place this information needs to be produced.

2. Outstanding bills with money in client account - need a weekly report.
SARS states that monies in client accounts, relating to payment of bills need to be transferred 14 days from receipt. If these are left for more than 14 days you will be in breach of SARS. So solicitors do need to be on top of their books, to be able to ensure that the relevant postings are made in good time.

3. Balance in client account must be returned it to the client.
It is important the balance is not billed to clearall funds. Any balance must be returned to the client regardless of the amount. For small amounts for example, anything under £1.00, then it's best to return that in the form of stamps as you often find that many people won't cash small value cheques, and so you are left with lots of unreconciled cheques waiting to be cleared in the bank. Many solicitors have small balances going back many years. As an exercise, it might just be worth trying to contact these past clients and returning their funds to them. It will simplify matters, and who knows, they may need your services again - you could be contacting them at the right time.

4. Use the office account when you want to draw a cheque against uncleared funds.
You actually don't have to sit and wait for funds to clear... if you get the authority from a practise partner, then you can draw a cheque against uncleared funds. On the one hand, this can save you time in your practice, but you need to be aware, because if the cheque is returned as unpaid you are in breach of SARS. Drawing funds, which ultimately turn out to not exist will result in an overdrawn client account. This is not allowed, because it means you've used client A's fund to support the activity of Client B. Client B needs his own money. Overall, the best way to avoid any of the above is to have your unpaids go through the office account.

5. Have a process for sending funds back to the client.
This is similar to tip 3, but it's slightly deeper. Despite many solicitors 'knowing' that they really ought to return clients funds to the client, very few actually get around to it. Failing to do this results in cumbersome books, and you don't want this. What you need is a process for sending funds back to the client - particularly when the cheque has not been cashed. You can't just close these accounts, if they have uncleared cheques sitting there. Nor can you just keep the money. You need to show that you have attempted to return the funds more than once. Failing this, then the solicitor needs to make an arrangement to send the funds to the Law Society. They have a Benevolent Fund, and they make the decision whether it will go to the charity or whether you can keep it. If it's for under £50.00 then it can normally go to a charity of your choice e.g. The MS Society. But what you cannot do is send the client a bill for it. Some solicitors do it, but it is wrong.

6. Cheques drawn should be sent to the client immediately.
Large cheques drawn and not banked after two weeks should be queried. If you haven't sent it out, it should be returned to cancel with possible interest added to the cheque. Solicitors have been known to draw cheques and sit on them while they benefit from the interest. This is wrong.

7. Documentation for yearly audit must be retained and filed in date order.
Paying in books, bank statements and bank reconciliation's signed by partner, are items that the auditor needs to refer to, to perform the yearly audit. Ideally, archive the records, and keep them for 6-year minimum in case an Inland Revenue inquiry arises.

To avoid the headache, you can always outsource the legal bookkeeping job to an experienced bookkeeping company such as Boogles Ltd. Visit: http://www.boogles.org or call 0844 8844 622 for more details.

What is a Chartered Accountant and Why Should You Hire One?

2008-11-23T18:27:00.003-08:00

For many people, an accountant is something that they feel they only need once a year when they are doing their taxes, if then - but the truth of the matter is that a chartered accountant is an individual who can help you out in a great many financial areas. Whether you are looking on your own behalf as a private citizen, or you are curious about what a chartered accountant can do for you or your business, you'll find that you can consider some of the following pieces of information.

When you are making a comparison between a chartered accountant and a regular accountant, you'll find that there are several important differences. Technically, anyone can call themselves an accountant who regardless of what licensing or education that they have. A person who calls themselves a chartered accountant, on the other hand, is someone who retains a membership in either the Institute of Chartered Accountants in England & Wales, the Institute of Chartered Accountants of Scotland or the Institute of Chartered Accountants in Ireland. These organizations will only allow membership after a series of examinations have been passed and after a certain amount of working experience.

Essentially, when you are working with a chartered accountant, you will find that you are working with someone who has a certain baseline of experience and certification under their belt. When your financial situation is complicated, or if you find that you are in over your head when it comes to financial matters, you'll find that taking on a chartered accountant can help you figure out how to proceed. You may also feel that retaining a chartered accountant will give you a great deal of peace of mind when it comes to the assurance that your financial matters are being handled competently.

When you are looking to retain a chartered accountant, you'll find that the accountants who engage in public practice work will have a practicing certificate which will declare them fit to do so. This means that they have met further requirements and that they have the appropriate professional experience with which to serve you.

When you are looking for someone to look over your financial matters, you'll find that a chartered accountant will most likely be the most competent individual in a place to do so. Take some time and make sure that you look into your accountant's credentials and to make sure that you are confident in their ability to handle your affairs.

Wilkins Kennedy have been offering professional services to business owners across England and worldwide for 126 years and have the expertise and experience necessary whether your business requires accountancy or taxation advice, or the annual audit is due.

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The Importance of Bookkeeping in a Business

2008-11-23T18:27:00.001-08:00

If you run your own business, no matter what size, bookkeeping is a legal requirement by H M Revenue and Customs.

Basic records you must keep

Your basic records will normally include:

a record of all your sales, with copies of any invoices you've issued
a record of all your business purchases and expenses
invoices for all your business purchases and expenses
details of any amounts you personally pay into or take from the business
copies of business bank statements

You or your accountant will use these records to create a profit and loss account - which shows the sales income you've received and the expenses you've paid, and what profit/ loss you've actually made. Your tax liability will be based on this.

Other records you must keep

All businesses are different and there are many specific types of detailed records that may need to be kept. Some examples of records you should keep include:

cash book
petty cash book
order notes and invoices
copy sales invoices
details of any other business income received
details of any private money brought into the business
till rolls or other form of electronic record of sales
details of any other income
any cash taken out of the till to pay small business expenses
bills and invoices for purchases and expenses
a record of stock on hand at the end of the year
all bank and building society statements, pass books, cheque stubs and paying-in slips which include details of business transactions

If you do not keep accurate and complete records you may end up paying more tax than is due because of lack of evidence of tax deductible expenditure or/and inaccurate sales records causing H M Revenue and Customs to assess your expected sales . If you pay an accountant to prepare your accounts they will charge you based on how long it will take them. If your records are more accurate this will reduce the time taken and therefore reduce the amount they charge.

The above reasons are sufficient to ensure you keep good books and records but the most important reason is to ensure you have control over your business and that you can assess its profitability and the cash flow situation therefore ensuring you are aware of any potential problems as soon as possible and can make business decisions with all available information at hand.

Alan Butler is a director of A Butler and Company, chartered certified accountants, based in Derby, providing a personalised service to local business owners and individuals.

Four Software Limited, 5A Darley Abbey Mills, Darley Abbey, Derby, DE22 1DZ, Tel 01332 200 604, Fax 01332 344329, http://www.foursoftware.co.uk

Diagnosing Common Errors in Quickbooks Part One - Negative Balances in A-P and A-R

2008-11-23T18:26:00.002-08:00

Introduction

Diagnosing problems in a QuickBooks file is easy once you know what you are looking for. It's usually a matter of glancing at the chart of accounts for anything out of the ordinary. The problem is that most business owners aren't sure what is out of the ordinary and what isn't. This is the first in a series of articles that will explain how to diagnose what the problem is and how to correct the problem once known.

Negative Balances in A/P or A/R

Although this may seem kind of basic for those who have been entering data into QB for a while, for those who haven't this may be new information, so hang in there for their sake. Accounts Payable is the account automatically created by QuickBooks when you enter your first bill. This is the account that all these amounts go into and from which these same amounts are taken when you pay the bill. More often than not, the clients I see for the first time have a negative balance in the A/P and cannot explain why, nor do they know what to do with it.

A negative balance in the A/P would indicate that YOU owe your vendor money, and though there are legitimate reasons why you would give a credit to a vendor, a refund for extra material sent, etc., most of the time it is the result of a simple mistake. That mistake is the entering of a payment to a vendor without entering the bill that the payment should apply to. This happens when the data entry clerk is not using the Enter Bills/Pay Bills screens and is simply entering the amounts paid into the check register. Since there is no corresponding bill, (according to QuickBooks) the amount of the check is entered as a credit toward the vendor specified.

Likewise, a negative balance in the A/R indicates that there are customers that your company owes money to. And again, there are legitimate reasons you would credit a customer, but often it is a mistake. The mistake that is made is that a customer payment is recorded without a corresponding invoice being recorded. If the invoice isn't recorded, then according to QuickBooks, this customer doesn't owe you anything, upon receiving the payment and recording it, you now have a customer you owe money to, but not really.

NOW HOW DO I FIX IT?

As with all questions related to accounting, the answer is, "that depends". If these are current mistakes and the bank accounts have not been reconciled as of yet, the method of correction is easy. For the A/P, look for the Pay Bills and enter in the same check number that you used earlier and pay the bill in that screen. The little 'oh-oh' screen will pop up telling you that this check number is already used, ignore it and use that number anyway. When you are done with all of these entries, return to the register and look for those identical check numbers, the ones entered correctly will have BILLPMT in the box below the check number, delete the one without that designation and you will have completed the task. Fixing the A/R is not much different, (assuming that the reconciliations have not been completed!) enter an invoice dating back to the time of the payment received for whatever that customer ordered. The invoice will counter the credit received and will bring the balance out of the negative to zero, unless the customer of course, still owes you for work done.

WHAT IF EVERYTHING IS RECONCILED?

If the negative balances date back into months that have been previously been reconciled and the bank statements and QuickBooks match, deleting these payments by customers and reentering them applying them to invoices will throw off all reconciliations for the rest of the year. You will then have to re-reconcile the bank accounts and that can be tedious.

For A/P corrections after reconciliations, DO NOT DELETE THE BILLS! We have to be a little creative with this so here goes. First, create a fake bank account; call it Adjustment Bank or First Bank of David, whatever you wish. Go to the Pay Bills screen and use the fake bank account to pay the bills you are sure have already been paid.

Once you have completed the entries, make a fake deposit from an account called adjustment into the fake bank account for that same amount of the already paid bills. This effectively zeroes out the bank account, which you can then make inactive.

For A/R corrections after reconciliations, since the amounts have already been received and deposited into the right bank account that has already been reconciled, simply entering in matching invoices to compensate for the received funds will not affect the bank account, and thus will not affect the reconciliations already done. Just make sure to tie out the payment to the invoice number you create by using the invoice number in the payment memo box. Since the amount won't change you won't have to worry about affecting the reconciled transactions.

CONCLUSION

Admittedly, this is not the ideal solution, and if you only have a few of these transactions and it won't require an entire year of re-reconciliations, you should do it the long way. However, this way gets you done sooner and let's you get on with the day to day business you love to do. I hope this helps you with your QuickBooks issues.

David Roberts, CFE, CQBPA, MBA, lives in Kissimmee, Florida with four girls, three dogs, two snakes and one wife. He has been a member of the ACFE for five years and has been studying fraud for longer than that. He is the owner of Homesoon Accounting Services which specializes in Quickbooks Consultations and Fraud Prevention and Detection.

Diagnosing Common Errors in QuickBooks Part Two - Excessive Amounts in Undeposited Funds

2008-11-23T18:26:00.001-08:00

This next article deals with a very common problem in that many business owners using QuickBooks don't follow through on all three steps in entering QuickBooks information. Often, upon examining the Chart of Accounts of a new client, I will find excessive amounts in their Undeposited Funds account which typically means that their bank balances will not match their statements and reconciliation is made virtually impossible to do accurately.

The Error

There is a three step process in dealing with customer payments. First, the invoice is created with the items, expenses, etc that you are charging your customer for. The invoice amount is then automatically put into the Accounts Receivable account anticipating that a payment will be received.

Second, when the customer does pay, it must be done through using the "Receive Payments" icon. Once the customer's name is entered, you will see the list of invoices that this customer still owes you money on. You enter the amount of the payment made and check off the invoice that the customer sent the payment in for. Click on save and close and you have now officially received the payment from the customer for that invoice.

But wait, the invoice now is considered paid according to QuickBooks, so the customer's balance will be what it should be. The amount however, stays in the Undeposited Funds account, which is where QB puts it after the second step. I have seen as much as four or five year's worth of received payments that have been put into the Undeposited Funds account, and yet have never been Deposited into the appropriate bank account. This third step is what many people miss.
Third, you must click on the Make Deposits icon, group all the payments, checks, etc as you would do on your bank's deposit slips and put them into the account on the day you physically took those checks to the bank and deposited them. For example, if you receive ten checks and you take all ten to the bank, your bank will record the total deposit, not the individual checks and amounts. When you reconcile the bank statements, the deposits in QB should match the deposits on the statements. So if your bank statement shows a deposit of $10100, the QuickBooks deposit should have a deposit of $10100.

If you have the Intuit Merchant services all the credit card transactions that have been processed will group together according to the day you processed them. You must click on the 'Get Funding Status' button which will link you to the Intuit Merchant Services site to verify that those payments have indeed been deposited. If you fail to do this in a timely manner, the information about their funding status is deleted from the Merchant Services server three months from the day you entered them and you will not be able to verify that the amounts have been funded.

A Costly Mistake

What some people have done is that they have 'forced' a deposit into the bank register when their statements don't match, and they still have the excessive amounts received in their Undeposited Funds Account. Now they reconcile the bank statements, and true, they will now tie out nicely, the financial statements will be completely wrong. How?

First, if you are having your taxes prepared using the QB reports, you have now told the preparer, AND the IRS that you have been paid twice as much as you actually have. And you will pay taxes on the money that you are forcing into your bank register as a deposit, and on the money that the customers actually paid you.

Second, now you have to have someone go in to correct these mistakes in the QuickBooks file by deleting the deposits forced in and applying payments received in Undeposited Funds to those deposits. This can take hours depending on how far back the issue goes and how many months need to be corrected.

Third, now you have to rereconcile the accounts, because by deleting these forced deposits that you have reconciled, you have thrown the reconciliations off by the amounts you have deleted. You will have to go into the bank reconciliation screen and click on the 'Undo Last Reconciliation' button until you get to the point at which these errors began to be made. Having a professional do this for you can be upwards of $100/hour and if you calculate at about 2 hours for each month's work that can add up quickly.

Can I Do It Myself?

There is no fast way to do this, but this is the procedure I would follow if I were completing this project. One, print out the deposit detail record going back to the time these mistakes were made complete with the dates of each deposit, the amounts, etc.

Two, use this printout and the 'Make Deposits' button to match the amounts of each deposit for each day it was deposited. Continue until you get up to the current period where you should start receiving and depositing payments correctly.

Three, delete all the 'forced' deposits from the bank register. Be cautious so as to not accidentally erase the corrected deposits. Fourth, using the 'Reconcile Bank' screen click on the 'Undo Last Reconciliation' button until you get to the month where the mistakes began to be made. If there are several months or years involved here, you still have to go back to the beginning so be patient. Fifth, re-reconcile each month to its own bank statement. This is the right way to do it and you should do it this way if you at all can.

Is There A Faster Way?

I do not recommend doing it this way! It is much easier, faster and tempting, but doing so can lead to an IRS auditor looking closer into your books than you wish them to and staying longer than you'd like. But yes, there IS a faster way. I have to caution that I do not recommend this in any way, shape or form but here is the easy way.

Choose the month at which you want to begin doing things 'right'. Let's say, October of 2008. Now, create a fake bank account called adjustment bank, whatever you'd like to call it. Go to the Make Deposits screen and click all the received funds from September 2008 to the beginning of the problem.

Make one lump sum deposit for the year into that fake bank account for all those payments that have been received. If it's more than one year's worth make sure to deposit them according to whatever year the money was received.

Make a general journal entry with the fake bank account and debit the fake bank account for that amount of money, the credit would be in the adjustment income account and would delete that amount. Now make that fake bank account inactive and make the adjustment income account inactive after zeroing it out.

Again, I do not recommend this at all, but you are done in less than half the time it would take you to do it the right way. And remember that whichever way you decide to solve this issue, to start and to keep doing it right from now on.

David Roberts, CFE, CQBPA, MBA, lives in Kissimmee, Florida with four girls, three dogs, two snakes and one wife. He has been a member of the ACFE for four years and has been studying fraud for longer than that. He is the owner of Homesoon Accounting Services which specializes in Quickbooks Consultations and Fraud Prevention and Detection.

How to Hire a Bookkeeper With Staying Power

2008-11-23T18:25:00.001-08:00

As a small business owner, using correct financial data is vital to your growth. All good decisions should be measured by analyzing the financial pieces of the puzzle along with projections of future revenue.

Have you come to one of these two circumstances below?

1. You work hard on your business and it is starting to prosper, but you realize you are spending too much time in administration areas. You want to use leverage to buy back your time so you can work on high level projects.

2. You realize you are really good at what you do, love doing it, but it seems that running a business is a combination of lots of jobs, and you don't fully understand the financial aspects, or like that part of doing business.

It's time to hire a bookkeeper!

Here are the ten most important areas in picking the correct bookkeeper. This is not just someone who will 'do the books". It is also someone you can trust with your full financial history and who you must create a working relationship with. A good bookkeeper can save you much more than you spend on their services.

1. A bookkeeper should have a minimum of a two year degree in Management, Finance, Accounting or Business Administration. Their choice to get this degree tells you they are serious about their future and they know education is key to personal growth. Further certifications show they have made a decision to offer their clients the very best opportunity for success.

2. A bookkeeper with well rounded experience is a must. You are not looking for just a 'payroll clerk' or 'accounts payable' activity. Background in various corporate finance departments and private business helps refine their decision making process and gives them an edge you will find helpful later.

3. What computer skills do they have? Are they current and skillful in the areas necessary to offer a full range of services areas like Excel sheets, or a financial Power Point slide? What level of technology does their office use? Are they certified in the financial software used? Do they back up client files to an off-site service? Does their office keep abreast of the latest details in their chosen field and the current business tools available?

4. Being detail oriented, and organized is a must. If they show up at the first consultation with color coordinated folder, business cards, letterhead, etc. you know you have hit the jackpot! Great bookkeepers love the challenge of taking a mess and cleaning up all the pieces to make a perfect financial file.

5. Communication skills must be at their highest level. Can they speak well, and formulate precise answers on the fly? Would they be a good representative of your business to a client? Will they be able to articulate financial information clearly? Do they listen attentively?

6. Testimonials and referrals are very important. Ask to see both. Can they supply you with a list of current clients they work with in a similar capacity?

7. What professional associations are they a member of? Do they have listed profiles that you can read on the association website? What do their peers say about them? What is in their social networking profiles?

8. Will they have the type of availability you feel is necessary to do the job completely? How is their work week structured? What would happen if you need to reach them on a weekend to answer a question?

9. Do they appear professional and polished? Do they dress appropriately? Does their outreach areas such as website or blog look well thought out and distinct? Will you be proud to say they are your outsourced partner?

10. Finally, confidentiality is extremely important. Soon you must divulge the most secret details of your business. This person will know everything there is to know! This is difficult at first, but in the long run, can you work with them on that level? Do they understand the importance of this area by bringing this subject up at least once in their first consultation?

Terry Santore is a Certified Public Bookkeeper and QuickBooks ProAdvisor certified by Intuit. You can learn more about her at http://www.QuicksilverBusinessSolutions.com or go to her blog at http://www.bitsofsilver.com

Accounting Problems Case Study - Very Small Furniture Sales and Manufacturing Company

2008-11-23T18:24:00.002-08:00

He finally had to close his doors, not because of the economy, but rather due to the accounting and management issues. Specifically, he had over a long period of time built up his business from scratch. He made furniture as works of art, beautiful stuff and had developed quite a reputation for himself. In fact, he did not even have a showroom, he simply set up on the main road outside of town and folks stopped by to purchase his hand made furniture and told their friends.

Eventually, the city expanded and then disallowed road-side sales, so he went and got a retail space in the old revitalized section of town. Unfortunately, he was selling so much furniture that he could not be in the showroom all the time, rather, he had to be in the workshop, something that only he could do, due to the artistic talent needed.

The center in "old town" was very nice, but expensive and he had to sell more and more to pay for the triple-net lease, and things were moving well, but that meant he was forced to produce more and more inventory, but this meant he could never be one with his customer as before. He hired a sales staff to work the stores mandatory hours; 10AM to 7PM, as per his lease agreement.

He had trouble finding the right people and they often sold the furniture too cheap or failed to give customers cash receipts. He eventually had to close the store, even though it was making money, even though he had so much demand he could hardly keep up. All due to cash flow, management and mostly due to accounting problems, unable to see where he was; he had no snap-shot of his financial situation. Thus, he could not get a loan, move his business to the next step or capitalize on all the goodwill, he had created over the years. Think on this.

"Lance Winslow" - Lance Winslow's Bio. If you have innovative thoughts and unique perspectives, come think with Lance; http://www.WorldThinkTank.net/.

Business Bookkeeping Blunders & Accounting Errors

2008-11-23T18:24:00.001-08:00

As tax season approaches, many small business accountants, CPAs and bookkeepers find their anxiety levels increasing.

In only a few short weeks, these accountants know they'll see silly bookkeeping errors in many of their small business clients' books--errors that have meant the business owners have paid too little or too much in taxes. Errors that mean the business owner hasn't really been able to effectively manage the finances of the business.

Fortunately, these common bookkeeping blunders are easy enough to fix--if you know what they are and if you know the simple steps you can take to avoid making them.

Bookkeeping Blunder #1: Pretending No Accounting System is Needed

The first--and perhaps most serious blunder--is especially common with new business owners. The neophyte business owner sometimes pretends he or she can make do without a real accounting system.

In place of a real bookkeeping system--something like Microsoft Small Business Accounting or Intuit's QuickBooks--the business owner simply collects receipts in a box or keeps a check register by hand. Or maybe the business creates the illusion of an accounting system by using something like Microsoft Excel to, at least, add up some of the numbers.

Unfortunately, the "no accounting system" doesn't work. Before you have your tax return prepared, someone (perhaps your tax preparer) will need to cobble together some sort of makeshift system. And that's too bad, really. Such a system will allow your tax return to be prepared. But such a system almost surely won't capture all your tax deductions. And the information that this crude "system" provides will be too late to help you better run your business.

Bookkeeping Blunder #2: Slow Entry of Accounting Data

Another common blunder? Taking too long to enter the accounting data into your system. Which is surprising, in a way...

You would think that people who've gone to the modest effort and expense of having a real accounting system set up would keep the system up to date. But often they don't.

The problem with pokey data entry is that any useful insights that come from your accounting system, come too late.

Whoever is doing your accounting should keep up to date on the data entry. Within a few days of some transaction actually occurring, the accounting system should reflect the activity.

Bookkeeping Blunder #3: Skipping Account Reality Checks

An important yet simple point: Of course people make errors in using their accounting systems. But the nature of double-entry bookkeeping means that it's usually relatively easy to catch errors. How? You need to reconcile your bank accounts at the end of each month when the bank statement arrives.

Furthermore, if you hold other valuable assets like inventory or investments, periodically you should compare what the accounting system says to an actual physical count or statements from an external source.

Regularly performing reality checks on key accounts (especially cash) cleans up all sort of easy-to-miss errors.

Bookkeeping Blunder #4: Financial Complexity Beyond Bookkeeping Skill Levels

One common bookkeeping blunder makes for awkward conversations between accountants and their small business clients. But you deserve to know what the blunder is...

Unfortunately, accountants regularly encounter business clients with finances that are too complex for their bookkeepers. And that's a huge problem. If the business gets too complicated for the in-house bookkeeper (often the owner's spouse), the accounting system slowly becomes more and more unreliable. And this accounting unreliability usually means the business will shortly get into big trouble. (How can someone successfully manage a business if they don't know when they're making or losing money or how much cash they have in the bank?)

By the way, you'll easily be able to determine if the accountant or bookkeeper is overwhelmed. She will be falling further and further behind on the data entry. She will be producing reports that make less and less sense. And, often items, the profit and loss statement or the balance sheet will include a suspicious catch-all account named something like , "Ask the Accountant," "Suspense," or "Intercompany Transactions" that keeps increasing in size.

Only two true solutions exist for the "too much complexity" problem. You can simplify the business (probably the best idea). Or you can find a more experienced (and probably more costly) bookkeeper or accountant.

Bookkeeping Blunder #5: Co-mingling Personal and Business Assets and Liabilities

One final bookkeeping blunder should be mentioned given the approaching tax season.

Many small businesses don't clearly separate their business finances from their personal finances. For example, the businesses may use a single checking account for both personal and business banking. The business may regularly borrow personally to pay for business expenditures--and vice versa. And the business owner may too frequently mislabel personal expenses as business deductions.

Sadly, rampant co-mingling of finances makes financial records and books pretty much useless for tax preparation and for use in managing the business's finances.

Seattle accounting firm Stephen L. Nelson, CPA serves small businesses and publishes the popular limited liability company explained web site.

Generally Accepted Accounting Principles (GAAP) - An Introduction For Beginners

2008-11-23T18:23:00.000-08:00

Accounting practices follow certain guidelines and procedures. Such guidelines and procedures are referred to as generally accepted accounting principles (GAAP). GAAP include a combination of legally mandatory standards and commonly accepted ways of calculating financial records. GAAP cover such things as revenue recognition, balance sheet item classification, and outstanding share measurements. The Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) provide guidance about acceptable accounting practices.

Although there is some discretion in interpretation of accounting principles, GAAP are based on four general components:

Consistency - All information should be obtained and presented consistently across all periods. If there is a difference in the means of reporting from one period to the next, this must be noted in the financial statements along with a valid reason for the difference.

Reliability - The procedures and results must be able to be replicated by an independent party. This ensures that the business is representing adequate financial records. If procedures and results are not reliable and instead are based on subjective information, they are likely to be disputed.

Disclosure - All relevant information that could influence the understanding and assessment of the financial records of the business should be disclosed in the financial statements. This should include all information that is significant enough to affect assessments and decisions

Comparability - The financial statements and documentations of such in a business must be able to be compared to similar businesses within its industry. This is important so that investors may determine the success of a business in relation to others in its same category.

Relevance - The information obtained from financial statements should provide information that is valuable in predicting the future financial state of the business.

Although adherence to GAAP is not required, it lends credibility with creditors and stockholders because it adds validity to financial statements and prevents financial misrepresentation. Creditors and stockholders are able to get an accurate picture of the financial status of a business and make sound decisions based on the financial records of the business. Furthermore, outside agencies will assume that the business has adhered to GAAP. Also, when a business follows GAAP, management is more able to follow the records in order to make small adjustments within departments or large decisions regarding the financial future of the business. Adherence to GAAP principles also helps to minimize deceptive and criminal practices because it provides guidelines and procedures for ethical accounting practices.

8 Bookkeeping Mistakes Made by Small Business Owners - Mistakes That You Need to Avoid

2008-11-23T18:22:00.002-08:00

In this article, we will discuss some of the most common bookkeeping mistakes made by small business owners that you absolutely need to avoid if you want grow your business:

1. Handle all bookkeeping work by yourself. Especially for a small business, it is very common for the owner to have a self-employed mindset. The owner will try to do it all by himself because of budget constraints. Although it does not seems like there are a lot of bookkeeping to be done at the beginning, you must develop a habit to record your book frequently so as to make your job easier in the future.

2. Do not tally your book with your business bank account. It is very important to make sure that what is on the bank statement is the same as your books. As long as the numbers tallied, you can be assured that there is no bank payment or receipt that have been missed out by you.

3. Forget to update your books. Sometimes, it is very easy to forget updating your book if you buy goods or services with cash or your company credit card. This will create trouble in the future as the numbers on your book will not tally with the numbers on the bank statement.

4. Not using the right bookkeeping software. Bookkeeping software can help reduce your workload and make your recordings more accurate. You should invest on the right software for your industry and train your staff to use it.

5. Forget to backup your data. You should backup all the data in your computer in case of any emergency. It only takes you very little time so there is no excuse for you not to do it.

6. Not organizing your information properly. You need to organize your information into the right category for easy reference. This will keep your recording simple and consistent for anyone who takes over your bookkeeping work.

7. Not registering for taxable sales. If your company's total sales reaches a certain amount (depending on your country of residence), you need to file for registration. Failure to do so may result in fines.

8. Do not have a separate business bank account. Even though you are a self-employed, it is a good practice to open a separate bank account solely for business transactions. This will make your bookkeeping job easier and makes everything much clearer.

These are 8 common bookkeeping mistakes made by many small business owners. Hope that with this article, you can avoid making the same costly mistakes.

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Accounting Abbreviations - Helping You Understand Accounting Jargon

2008-11-23T18:22:00.001-08:00

When you start a business you quickly find out that you need to understand accounting terms. Whether you are dealing with your accountant, bookkeeper or doing the accounting yourself, you will encounter accounting abbreviations. Most business people have heard of "Accounts Payable" (AP) and "Accounts Receivable" (AR). But what about AJE? That stands for "Adjusting Journal Entry" which you will likely encounter when your accountant is ready to close your accounting books for your business' fiscal year.

I have been in business for several years and have compiled a list below of some of the most common accounting abbreviations and accounting terms that you will encounter. Having this handy list available helps you focus on your business rather than spending excessive time deciphering accounting terms. Even if you use accounting software such as QuickBooks, it is still useful to become familiar with these terms.

ABC: Activity Based Costing
AJE: Adjusting Journal Entry
AP: Accounts Payable
AR: Accounts Receivable
AT: Asset Turnover
BB: Beginning Balance (see also: EB)
BV: Book Value
CJE: Closing Journal Entry
CM: Contribution Margin (= Sales less Variable Costs)
COGM: Cost Of Goods Manufactured
Cr: Credit
CVP: Cost-Volume-Profit
Dr: Debit
EB: Ending Balance (see also BB)
EPS: Earnings Per Share
EVA: Economic Value Added
FIFO: First In, First Out (see also: LIFO)
FC: Fixed Costs (see also: VC)
FS: Financial Statements
FYE: Fiscal Year End; (e.g.: FYE2010)
GAAP: Generally Accepted Accounting Principles
GL: General Ledger
IS: Income Statement
ISO: International Standards Organization
JE: Journal Entry
JIT: Just In Time
LIFO: Last In, First Out (see also: FIFO)
LOC: Line of Credit
NI: Net Income
OH: Overhead
PL: Profit/Loss Statement
PM: Profit Margin
PVA: Process Value Analysis
RE: Retained Earnings
ROI: Return On Investment
SAG Expenses: Selling, Administrative, and General Expenses
SHE: Stockholders Equity
SP: Sales Price (price of goods/services sold)
TB: Trial Balance
VC: Variable Costs (see also: FC)
WIP: Work-In-Progress

There are many other accounting terms but the above terms are the ones that I have found are a good starting in helping you understand accounting.

About the Author: DrCr.com ( http://www.drcr.com/ ) is a website with many accounting resources for small business.

Basic Accounting Concepts - An Introduction For Beginners

2008-11-23T18:21:00.000-08:00

The definition of accounting is the study of how businesses track their income and expenses. Accounting practices are essential in a business for two major reasons:

- To determine whether or not a business is making a profit and how much profit is being made.

- To collect financial information for filing tax returns.

In order to understand accounting systems, knowledge of some basic accounting concepts is necessary. The accounting process is comprised of three parts, which include the journal, general ledger, and subsidiary ledgers. Each of these parts provide valuable information to a business owner.

Journal - Each individual transaction entry is entered and recorded in a journal. There are often several different types of journals in a business. Each type of journal records a different type of transaction. For example, a transaction may be classified as a sale, purchase, cash receipt, or cash disbursement. After these transactions are entered and organized in the journal, they are transferred to the general ledger.

General Ledger - After being transferred from the journals to the general ledger, the financial data is organized into three main categories: Assets, Liabilities, and Capital. The account balance is then calculated and a financial report is obtained.

Subsidiary Ledger - The subsidiary ledger provides more specific information that is not able to be provided in the General Ledger, such as the name and demographics of each customer and the customer's balance. This information is obviously important for billing purposes.

Understanding of debits and credits is the foundation of understanding accounting systems. Because every business transaction affects at least two accounts, each transaction is recorded using a double-entry system of debits and credits. Debits are entered on the left side of the balance sheet. Credits are entered on the right side. Costs and Expenses are recorded as debits. Income is recorded as credits. Assets are recorded as debits. Liabilities are recorded as credit. Debits and credits must be equal for all entries.

The following is referred to as the General Accounting Equation:

Assets = Liabilities + Owner's Equity

Assets are things of value that the company owns. Liabilities are what the company owes. Owner's equity (or capital) is the net worth of a business and includes any debt owed to business owners.

For example, say I am buying a car for $10,000. If I borrow $5500 and have saved $4500, my assets are worth $10,000, my liabilities are $5500, and my equity is $4500. If we plug these numbers into the General Accounting Equation, we come up with $10,000 = $5500 + $4500. Note how the equation is balanced.

Mary Blomquist writes articles and provides information on business topics. For more information, please visit http://www.blomarservices.com