Bookkeeping Boot Camp for Business Owners

Transcription

1 Bkkeeping Bt Camp fr Business Owners Hw t Take the Fear ut f Finance Jan Rasmussen 2015

2 BOOKKEEPING BOOT CAMP FOR BUSINESS OWNERS Taking the Fear Out f Finance Chapter 0 Cntents Chapter 1 Start With the End In Mind... 4 Why D Yu Need t Keep Bks?... 4 Chapter 2 Bkkeeping Systems... 6 Chapter 3 The Building Blcks f a Duble Entry System... 8 Chart f Accunts... 8 Chapter 4 Financial Reprts Incme Statement (Prfit and Lss) Balance Sheet Statement f Cash Flws Accunting Wrksheets Trial Balance General Ledger Debits and Credits Jurnal Entries Chapter 5 Data Entry Surce Dcuments Data Entry Recnciliatins Chapter 6 Other Cnsideratins Payrll Sales Tax Inventry Chapter 7 Financial Ratis What are Financial Ratis and Why D Yu Need Them? Liquidity Ratis In Balance Bkkeeping Service 2015 Page 2

3 Asset Turnver Ratis Prfitability Ratis Chapter 8 Hiring an Outside Bkkeeper Wrking With a Bkkeeper Selecting a Bkkeeper Chapter 9 Cnclusin Chapter 10 Business Scenari Checking Accunt 18, Balance Sheet Inventry Asset 10, Balance Sheet Undepsited Funds Balance Sheet Cmputer Equipment 2, Balance Sheet Furniture and Fixtures 10, Balance Sheet Rent Security Depsit Balance Sheet Accunts Payable 9, Balance Sheet Credit Card Balance Sheet Cmputer Lan 2, Balance Sheet Sales Tax Payable Balance Sheet Fixture Lan 4, Balance Sheet Owner Investment 25, Balance Sheet Owners Draw Balance Sheet , , Balance Sheet Ttal Sales 9, Prfit and Lss Cst f Gds Sld 6, Prfit and Lss Interest Expense Prfit and Lss Office Supplies Prfit and Lss Rent Expense 1, Prfit and Lss Repairs and Maintenance Prfit and Lss Telephne Expense Prfit and Lss Utilities Prfit and Lss , , Prfit and Lss Ttal In Balance Bkkeeping Service 2015 Page 3

4 Chapter 1 Start With the End In Mind S yu have started a business. Or, yu are abut t start a business. Cngratulatins! Yu are embarking n the ride f yur life. There are a lt f activities invlved in getting yur business set up, and at sme pint (hpefully sner rather than later), yu will need t set up a bkkeeping system. The purpse f this bk is t educate yu n the basics f a bkkeeping system and hw t use the infrmatin in it t manage yur business. It is NOT a training manual n hw t d yur wn bkkeeping. Bkkeepers and accuntants have spent a lt f time in schl learning hw t d their jb, and while mst business wners can handle 80% f their business transactins, the ther 20% that gets mis-handled can get yu int real ht water. Plus mst peple dn t really find bkkeeping t be a fun activity, s why spend time n it when that time culd be better spent n incme-prducing activities? That des nt mean yu shuldn t pay attentin t yur bks, even if yu utsurce the actual bkkeeping. It s yur mney and yu need t understand what is happening with it! Sme thughts n the Fear f Finance frm which many business wners suffer: peple ften start their wn business t pursue their passin and d wrk that they lve. They hpe t make mney at it but will tell yu that they aren t ding it fr the mney. Well, if yu are in business, accrding t the IRS, making a prfit is, by definitin, a gal. Even if mney isn t yur first pririty, yu have t admit it cmes in handy. Mney is ften assciated with greed, but in reality mney is just the ultimate barter system. It represents the value f the gds and services yu prvide r btain, and is a lt easier t mve arund than trying t swap the gds r services that yu prvide fr the gds and services that yu need. Have yu ever tried t barter with yur mrtgage cmpany? Mney is just an easy and universal way t exchange value. S if yu think yu are prviding value t yur custmers, charging fr that value shuld cme naturally, and if they truly value it, they shuld be willing t pay fr it. That s als a gd basis fr yur business mdel if yu are prviding a service r prduct that peple say they want but aren t actually willing r able t pay fr, then yu dn t have a viable business. Why D Yu Need t Keep Bks? Why d yu need t keep bks fr yur business? There are several gd reasns: Tax preparatin. As a business wner, yu will find yu will need t pay varius types f taxes. A bkkeeping system is necessary t accurately file tax returns and pay taxes. Sme types f taxes are: Incme Tax. This is the biggie. The type f tax return yu will need t file depends n the frm f wnership yu have set up fr yur business. But whatever return yu need t file, yu will need cmprehensive set f bks t accurately file incme taxes.

5 If there is any questin in the IRS s mind abut whether r nt yur business is actually a business, a well-maintained set f bks is ne f the things they will lk fr. Sales Tax. If yu perate in a state that has sales tax, yu need t track yur taxable and nn-taxable sales and cllect, reprt and depsit the apprpriate taxes. Payrll Tax. If yu have emplyees, yu will need t withhld taxes frm yur emplyees checks and depsit them alng with the emplyer s share f payrll taxes. Yu will als need t prepare quarterly and annual payrll tax returns. Prperty Tax. Yu will prbably be paying prperty taxes n yur business equipment, and will need t track yur equipment purchases and dispsitins. Presenting Financial Data t Others. There culd be several reasns fr this, including: Obtaining Credit. If yu need t btain a business lan r establish a line f credit, yu will need t present an accurate set f financial statements Prfessinal Organizatins. Yu may need t submit a summary f yur financial situatin. Selling Yur Business. If, at sme pint, yu decide t sell yur business, the buyer will undubtedly examine yur bks with a fine-tth cmb t see what they are getting int. Internal Management. This ne f the mst verlked reasns, but prbably the mst imprtant fr the success f yur business! Plan fr prfitability and track yur results Set up a budget Establish and track financial metrics Once yu knw why yu are setting up a set f bks, it becmes easier t decide n what system yu need t set up. There are a lt f d-it-yurself systems ut there, but if yu dn t have a strng backgrund in bkkeeping r accunting, it makes sense t engage an accuntant r bkkeeper t help set up the bks and the systems t maintain them. It als makes sense t talk t yur tax preparer abut what they will need frm yu t prepare yur tax return, and keep thse needs in mind when designing the system. Befre setting up yur system, here is a very sund bit f advice: KEEP YOUR BUSINESS AND PERSONAL FINANCES SEPARATE! This means that yur business has its wn checking accunt (and credit card if yu will be using ne). There are ways t get funds int and ut f yur business bks, but if yur checking accunt is a hdge-pdge f persnal and business transactins, it will be next t impssible t get an accurate set f financial statements. The IRS als takes a dim view f this when determining if yu are really in business r just engaging in a hbby that invlves financial transactins, s run yur business like a business! In Balance Bkkeeping Service 2015 Page 5

6 Chapter 2 Bkkeeping Systems There are varius types f bkkeeping systems available, ranging frm very simple t very cmplicated. The first cnsideratin is whether yu need a single-entry system r a duble-entry system. Single-Entry Accunting. This system is apprpriate fr nly the simplest frms f business. It des nt invlve debits and credits (the basis f duble-entry accunting), and there is n balanced set f bks. In this system, yu just recrd receipts and expenses. This system fcuses n the prfit and lss, and nt the balance sheet. Since it desn t result in a balanced set f bks, there is n guarantee that it is accurate. While it can wrk fr a very small business, if the business is ging t grw, cnsider using duble-entry accunting right frm the start. Duble-Entry Accunting. This is the traditinal accunting system where every transactin has 2 sides a debit and a credit (mre abut this later). This system is self-balancing and frces a degree f integrity n the data entry. Bth a prfit and lss and a balance sheet can be prduced frm this system. This bk is ging t fcus n the results yu get frm a duble-entry system. Once yu ve decided n single-entry r duble-entry accunting, yu need t pick the actual system. There are a lt f systems ut there, but the nes I usually see are: Manual Ledgers. This is the ld-style system I learned way back in schl where yu write dwn entries in paper ledger bks. There are ledgers fr bth single- and duble-entry systems. In a duble-entry system, yu wuld enter debits in ne clumn and credits in anther, and add up the clumns t balance them. These systems wrk but an autmated system makes things much easier. Spreadsheet. Many peple develp their wn Excel spreadsheets, r use a template designed by smene else. A step up frm a manual ledger, but still nt a cmprehensive bkkeeping system. Accunting Sftware. This is the chice f mst businesses, and they range frm very simple t very cmplex. Simple systems, ften free, like FreshBks perfrm many f the accunting tasks such as billing yur custmers and paying yur vendrs, and may balance yur checkbk, but still aren t full duble-entry systems. Cnsumer systems such as mst versins f QuickBks. These are nt as full-featured as high-end enterprise accunting systems but fit the bill fr mst businesses. Sme ppular brands are QuickBks, Sage, and AccuntEdge. Enterprise systems, used by larger cmpanies, are very full-featured. They are designed fr multiple users and ften have separate mdules fr varius accunting functins, such as Accunts Receivable, Sales, etc. Usually mre cmplex and mre expensive than needed by a truly small business. In Balance Bkkeeping Service 2015 Page 6

7 When selecting yur system, cnsider what yur accunting needs are. Sme features yu may need t lk fr are: Payrll. This is usually a separate add-n t a sftware package. Inventry tracking. If yu maintain inventry, yu shuld discuss with yur bkkeeper and tax preparer hw yu want t track it. This can be far mre cmplex than it appears, especially if yu d any srt f manufacturing. If yu decide t track inventry, be prepared t put in the time t d it crrectly. This is ne f the areas where business wners can get int truble with the bkkeeping. Sales tax tracking. If yu cllect sales tax n prducts yu sell, check fr a system that can accurately track it and prvide the infrmatin yu need t reprt it. The list f features ges n and n. Have a gd idea f hw yur business is ging t perate and discuss the mney flw with yur bkkeeper s yu can shp fr and set up the apprpriate system. And finally, yu need t cnsider whether yur cmputerized system will be a desktp versin r an nline versin. Desktp versins tend t have mre functinality and may be faster and easier t use, and can be less expensive in the lng run, while nline versins have mre limited functinality, may have sme awkward navigatin, and invlve a mnthly fee. Hwever, they are accessible by multiple users at the same time and frm varius lcatins, yu dn t need t wrry abut versins, and yur data is generally backed up fr yu. Desktp sftware usually has a new versin cme ut every year, and while yu can cntinue t use yur ld versin, at sme pint features such as payrll and bank dwnlads will g ut f supprt life and wn t wrk anymre. Fr example, yu will need t buy a new versin f QuickBks every 3 years if yu use payrll r bank dwnlads. The nline sftware is always the latest versin. In Balance Bkkeeping Service 2015 Page 7

8 Chapter 3 The Building Blcks f a Duble Entry System Chart f Accunts The first thing t d when setting up yur bkkeeping system is t develp yur Chart f Accunts. These are the buckets r categries yur mney ges int. They are the basis f yur financial statements. There is a standard frmat fr the types f accunts, and they are used t build yur financial statements: the Balance Sheet, and the Prfit and Lss. The Frmat: Balance Sheet Accunts Assets. A simple definitin f an asset is that is smething that a business wns. An asset will increase the net wrth f a cmpany. Keep in mind that this is a very simple explanatin. Assets can be subdivided: Current Assets these are assets that can be cnverted quickly t cash, usually within 1 year. They include things like cash, accunts receivable, and inventry Other Assets These are assets that can t be cnverted easily t cash, such as Fixed Assets r Ntes Receivable that aren t due fr mre than a year. Liabilities. The simple definitin f this is that it is smething the cmpany wes. Liabilities reduce the net wrth f a cmpany. These can als be subdivided: Current Liabilities liabilities that will be paid within the year. This can include Accunts Payable, Sales Tax Payable, Payrll Taxes Payble, and Credit Cards Payable. It als includes the prtin f a lan that is due within the year. Lng-Term Liabilities liabilities that are due in mre than a year. This can include ntes payable, and the prtin f a lan that is nt due fr mre than a year. Equity. The equity sectin f the balance sheet represents the net wrth f a business. The accunts used depend n the type f business. A business that is a sle prprietrship will have a different set f equity accunts than a crpratin. It includes initial investments in the business additinal amunts invested by the wners retained earnings (earnings frm prir years) current year s net incme. It is reduced by amunts taken ut f the business b y wners (draws, distributins, r dividends). The Balance Sheet is called that because it balances. The equatin is: Assets = Liabilities plus Equity. Prfit and Lss (Incme Statement) Accunts Revenue this is mney cming in frm business peratins (sales), reduced by discunts and allwances granted.

9 Cst f Gds Sld the cst f prducing the items t be sld. This can be purchases f items fr resale, r the cst f materials and labr t prduce items that are manufactured. Expenses This sectin is fr nrmal perating expenses, such as rent, payrll, supplies, licenses and permits, etc. Other Incme This is fr incme that desn t result frm nrmal business peratins, such as interest n savings accunts Other Expense This is fr expenses that dn t result frm nrmal business peratins, such as tax penalties. The actual accunts that yu set up in each f these categries will depend n yur business. Mst sftware prgrams will ffer a template that yu can use fr yur particular industry, but it is very uncmmn t use thse templates as they are set up. Generally a template is selected, and then custmized t fit the particular business. Use sme care when setting up yur chart f accunts. It shuld be kept as simple as pssible while still giving yu meaningful financial reprts. A cmmn errr is t set up an accunt fr each vendr in the expense sectin. Fr example, if yu buy ffice supplies frm Acme Office Prducts, yu will set up an accunt called Office Supplies that will be used t track ffice supplies n matter what vendr they are purchased frm. Acme Office Prducts will be set up as a Vendr in yur prgram s that yu can track purchases frm them using different reprts, but yu will nt set up an accunt in yur Chart f Accunts called Acme Office Prducts. Accunting prgrams have lists fr vendrs, custmers, emplyees, etc. A transactin bked t an accunt can als be tagged t a name n ne f thse lists, s yu can filter transactins by the names n thse lists t get infrmatin by vendr r custmer. In Balance Bkkeeping Service 2015 Page 9

10 Chapter 4 Financial Reprts Financial reprts summarize the financial activities f yur business. They are the prducts f yur accunting system. There are a lt f reprts available thrugh mst accunting sftware packages, but let s take a lk at the mst basic financial reprts. Incme Statement (Prfit and Lss) The incme statement reprts activity in the Incme Statement accunts (see earlier sectin n Chart f Accunts ) fr a specified time perid. It reprts revenue, cst f gds sld, and expenses. It nets ut that activity t reprt yur net prfit r lss. Let s take a minute t define incme and expense. Incme, r revenue, is the mney received as a result f yur business peratins. This includes sales f prducts and services. It des nt include all mney cming in. Funds can cme frm surces such as wner investment and lans, which are reprted n the balance sheet. Expenses include mney spent n business peratins. It desn t include wner withdrawals r the principal prtin f lan payments, fr example. These are als reprted n the balance sheet. That means that Net Incme des NOT necessarily relate t cash flw. There is a cash flw reprt (described later) that starts with net incme and then makes adjustments fr transactins that affect cash but are nt reprted n the prfit and lss. Yur prfit and lss can be set up t cmpare yur actual results t yur budgeted reprts. Cming frm the crprate wrld, I m accustmed t spending a LOT f time develping budgets and cmparing actual results t thse budgets. I was surprised when I started ding bks fr small businesses t find ut hw many business wners dn t develp budgets fr their business. Often they have develped sme srt f budget t btain financing, r because they dutifully prepared a business plan that included sme srt f budget, but thse budgets ften dn t represent what is really ging t happen. I strngly recmmend setting up a budget t frecast what yu think yur financial results are ging t be! Yu might want t wrk with yur bkkeeper r accuntant n this, as they will likely have sme experience in sme csts yu may encunter that yu may nt anticipate. That budget can be entered in yur accunting sftware s that yu can cmpare actual results t the budget, allwing yu t make adjustments thrughut the year. The adjustments may be t change yur spending patterns, r even t adjust yur budget if yu discver that yur prjected results were unrealistic. Balance Sheet A balance sheet is a snapsht f yur financial psitin at a particular pint in time. While yur Prfit and Lss reprts activity ver a perid f time, the balance sheet shws yu what yu wn, what yu we, and yur net wrth at a specified date. Statement f Cash Flws The statement f cash flws reprts the surces and uses f cash during a certain perid. It starts with the beginning cash balance and slws the ins and uts t arrive at the ending cash balance. This is nt the same as the Prfit and Lss! The Prfit and Lss nly explains changes due t activity in the prfit

11 and lss accunts. It desn t include mney invested r withdrawn by the wner, mney cming in thrugh lans r repayment f lans, purchases f capitalized equipment, and if the business is n the accrual basis, it desn t include sales made n credit that haven t been paid fr (Accunts Receivable). Thse are just sme examples there are many ther transactins that can affect cash that aren t reflected n the Prfit and Lss. A typical frmat fr the Statement f Cash Flws starts with the Net Incme figure frm the Prfit and Lss, and then reprts activity that affects Cash that is nt reflected in the Net Incme figure. These are brken int these categries: Operating Activities Identifies items n the Prfit and Lss that d nt affect cash balances, such as changes in Accunts Receivable r Accunts Payable Investing Activities identifies the use f funds t purchase items that are reprted n the balance sheet, such as capital equipment and investments Financing Activities reprts activities relating t lans and changes in equity (dividends r wner investments and draws, fr example) Supplemental Infrmatin Reprts items that affect cash that are nt reflected in Net Incme and dn t fall int any f the ther categries listed abve. Accunting Wrksheets The fllwing reprts are ften requested and used by accuntants t review accunt balances and activity, but are nt typically part f the mnthly reprting package. Trial Balance The Trial Balance is a wrksheet that shws the ending balance f all accunts in the general ledger as f a specific date. There are clumns fr debits and credits, and the ttal f thse clumns shuld match. Typically, the Prfit and Lss accunts will shw activity fr the year, and amunts bked t thse accunts fr prir years will be reflected in the equity sectin retained earnings accunt. General Ledger The General Ledger shws the detail f activity in all accunts fr a specified perid f time. Debits and Credits The reprts listed abve will reprt balances based n the transactins bked int each accunt. Transactins in a duble-entry system always have 2 sides a debit and a credit f equal amunts, s the transactin balances r nets t zer. A cmplex transactin may have mre than 2 line items with varius debit and credit amunts, but the debits and credits will always be equal. Debits and credits will affect different types f accunts in different ways: Asset Accunts a debit will increase an asset accunt and a credit will decrease it Liability Accunts a debit will decrease these accunts and a credit will increase it Owner Equity a debit will decrease these accunts and a credit will increase it Incme Accunts decreased by debits and increased by credits In Balance Bkkeeping Service 2015 Page 11

12 Cst f Sales increased by debits and decreased by credits Expenses increased by debits and decreased by credits Let s take a sales transactin as an example. Yu sell an item fr $100 and are paid in cash. The transactin is: Dr (abbreviatin fr debit ) Cash $100 (a Balance Sheet accunt) Cr (abbreviatin fr credit ) Sales $100 (an Incme accunt) S nw yu have increased Cash and als increased Sales. Sme Accunting Histry: the terms debit and credit were first used by Venetian Luca Pacili in his 1494 wrk Summa de Arithmetica, Gemetria, Prprini et Prprtinalita, ne sectin f which was devted t the duble-entry bkkeeping system used in Venice during the Renaissance. This system is still fundamentally the same system used tday. Nbdy is exactly sure hw the wrds debit and credit came t be used, but ne thery is that they came frm Pacili s use f debere (t we) and credere (t entrust). Jurnal Entries A jurnal entry is the recrding f a transactin. It is hw transactins are recrded in a duble-entry bkkeeping system. In a jurnal entry, the debits and credits must always equal. Bkkeeping systems such as QuickBks may use frms fr data entry the make the data entry prcess easier, but a jurnal entry is being created in the backgrund when the frms are used. In Balance Bkkeeping Service 2015 Page 12

13 Chapter 5 Data Entry Nw yu have sme knwledge f what happens in a set f bks. Hw des the infrmatin get int the bks in the first place? Surce Dcuments Transactins affecting yur bks are captured in varius types f surce dcuments. Hw yur business is set up will affect what thse surce dcuments are. Sme typical surce dcuments are: Sales Dcuments (Z-tapes frm cash registers, POS sftware, industry-specific sftware, handwritten receipts, etc) Lan Dcuments (t set up and amrtize lans) Purchases/Cash Disbursements (vendr invices, receipts, etc) Credit Card Statements Accunt Transfers Bank Statements Data Entry There are varius ways t enter the transactins reprted n these dcuments: Manual entry. Smebdy sits dwn with the surce dcuments and manually enters the transactins int the accunting system Electrnic Dwnlads: Mst accunting sftware will link t varius accunts and allw yu t dwnlad the transactins. Generally, yu can review these transactins and make crrectins befre entering them int the system Bank accunts Credit card accunts Outside sftware (sales, inventry, etc.) Recnciliatins Hw d yu knw that everything has been entered? The balance sheet accunts shuld be recnciled n a regular basis t help make sure that all activity has been captured. Recnciling an accunt means that yu match the transactins and balances in yur sftware with the amunts reprted n the surce dcument. Bank Accunts Credit Card Accunts Lan Accunts als a check t make sure that the interest and principal prtins f payments are reprted crrectly Accunts Receivable and Accunts Payable shuld als be reviewed regularly fr crrectness and t ensure yur cllectin and payment prcesses are effective.

14 When recnciling an accunt, yu want t nt nly make sure everything n the statement is in yur accunting recrds, but if yu have smething in yur accunting recrds that desn t shw up n the statement, that needs t be investigated and cleared up as well. In Balance Bkkeeping Service 2015 Page 14

15 Chapter 6 Other Cnsideratins Payrll If yu have emplyees, yu will need t calculate payrll accurately, including emplyee deductins and emplyer s taxes, make timely payrll tax depsits, and file state and federal payrll tax returns. While this can be dne manually, it s MUCH simpler and mre accurate t either use payrll sftware (such as Quickbks payll) r use a payrll cmpany. If payrll isn t reprted and paid crrectly t tax agencies, the penalties and interest can add up quickly, s sftware r payrll services are well wrth the cst t keep cmpliant with the regulatins and avid the penalties. One nte: if yu are a business wner and take mney ut f the business withut actually running it thrugh payrll, this is NOT a payrll expense and it is nt deductible as a business expense. It s a draw r distributin, depending n yur business entity type, and reduces yur equity in the business. This is a standard practice, especially fr sle prprietrships where the wner CAN T be n the payrll, but a lt f new business wners incrrectly classify their draws as payrll expense. Sales Tax If yu perate in a state that cllects sales tax, yu will need t set up yur bks t crrectly calculate, reprt, and submit sales tax. Accunting sftware can d this fr yu. Make sure yu understand yur state s rules and rates, and if yu d business ut f state, yu will need t understand hw that affects yur ut-f-state sales tax bligatins. Sales tax rules can be very cmplex s d yur hmewrk! Inventry If yu sell a prduct (as ppsed t a service), yu may need t track inventry. This is an accunting area that is far mre cmplex than it appears! Mst accunting sftware has an inventry tracking feature, but unless scrupulus attentin is paid t the entries, yu are likely t create mre prblems than yu slve. There are ther ptins fr small businesses. I usually recmmend that a physical cunt be perfrmed peridically, and a manual inventry adjustment be made based n that cunt. This desn t give the nging management reprting that a well-maintained inventry system will prvide, but I have rarely seen a small business crrectly maintain the inventry tracking system, usually resulting in wildly inaccurate reprting. If yu really need t track inventry, make sure yu understand yur tracking system and then be diligent abut entering data crrectly. If yur prcess is cmplex (yu manufacture a prduct, fr example) yu may need an add-n inventry applicatin t get the results yu need frm yur sftware.

16 Chapter 7 Financial Ratis What are Financial Ratis and Why D Yu Need Them? Financial Ratis are indicatrs f a firm s perfrmance and financial situatin. They are usually derived frm the infrmatin n a business financial statements. Banks will lk at these when cnsidering making a lan, investrs are interested in these and, mst imprtantly, yu as the business wner need t be interested in these as well t check n the health f yur business! If the ratis aren t acceptable, yu knw it s time t make sme srt f curse crrectin Getting int all the details f all the ratis used in business is beynd the scpe f this bk. Fllwing are sme f the mst basic ratis, hw they are calculated, and a quick descriptin f what they mean. Liquidity Ratis Current Rati. This is the rati f Current Assets / Current Liabilities. Lenders like a higher number fr this rati as it is a safety indicatr. But if the number is high, it als means that yu may be under-utilizing yur assets. Current Assets / Current Liabilities Quick Rati. One drawback f the Current Rati is that it includes inventry, which is a current asset but may nt be all that liquid (easily cnverted t cash). The Quick Rati takes inventry ut f the picture and is calculated as (Current Assets Inventry)/Current Liabilities Cash Rati. The mst cnservative rati t determine liquidity. (Cash + Marketable Securities) / Current Liabilities Asset Turnver Ratis These ratis determine hw well the business utilizes its assets Receivables Turnver. Hw quickly the business cllects its accunts receivables Annual Credit Sales / Accunts Receivable Inventry Turnver. As the name indicates, this indicates hw ften the business turns ver its inventry. Different types f businesses have different turnver ratis. Inventry with a limited shelf life r ptential fr bslescence bviusly needs t turn ver mre quickly. Generally, the higher the turnver, the lwer the grss prfit margin can be. Cst f Gds Sld / Average Inventry Prfitability Ratis These measure the success f a firm at generating prfits. Grss Margin (Sales Cst f Gds Sld) / Sales Return n Assets Net Incme / Ttal Assets

17 Return n Equity Net Incme / Sharehlder Equity In Balance Bkkeeping Service 2015 Page 17

18 Chapter 8 Hiring an Outside Bkkeeper Wrking With a Bkkeeper If yu decide t utsurce yur bkkeeping, hw des that wrk? What will they d and what shuld yu expect? Hw d yu knw if they re ding a gd jb? Yur bkkeeper s primary jb is t maintain yur financial recrds t prepare financial statements. This includes recnciling balance sheet accunts such as bank accunts and credit card accunts. They may d all the bkkeeping, r yu may d sme f the data entry and they may just cme in peridically and review, crrect and recncile the bks. Other tasks they may perfrm, depending n yur particular business, can include: Payrll preparatin (including submitting payrll tax depsits and preparing payrll tax returns) Sales tax reprting and paying 1099-MISC Reprting. Frm 1099-MISCs are required by the IRS t be issued t vendrs wh prvide $600 r mre in services t yur firm during the year, as well as varius ther transactins. A cpy f the frm is sent t the IRS. It serves the same purpse as a W-2 issued t an emplyee it lets the IRS knw that vendr has received incme that needs t be reprted fr tax purpses. There is an exceptin t the requirement if the vendr is a crpratin. Maintaining Accunts Receivable (billing, psting payments, reviewing utstanding balances) Maintaining Accunts Payable (psting bills frm vendrs, paying, reviewing utstanding balances) Tracking cash flw. Yu shuld NOT expect yur bkkeeper t: Prvide tax advice (yu need a tax prfessinal) Slve yur cash flw prblems. They can prvide infrmatin t assist yu but it is nt up t yur bkkeeper t make yur cash flw prblems disappear! Catch every mistake. Of curse, yur bkkeeper shuld exercise diligence in maintaining yur bks, but if yu are entering data in yur system and yu misclassify smething, they may nt catch it every time, especially if it desn t create a glaring errr in the financial statements. Read yur mind. If yu dn t understand the reprts yu are receiving frm yur bkkeeper, r if yu have smething unusual happening in yur business that will affect the bkkeeping (a new lan, a new business venture, etc), let them knw! While yur bkkeeper needs access t yur financial data, including quite a bit f sensitive data, I recmmend against actually allwing them t spend yur mney, with the exceptin f scheduling tax depsits thrugh a tax agency. This means nt giving them signature authrity n yur bank accunt, allwing nline access t yur bank accunt if it means they can transfer funds r pay bills, r giving

19 them access t yur credit card (unless yu can give them an emplyee card with an apprpriate limit, and even then yu shuld keep yur eye n the activity). Mst bkkeepers are hnest but there are a few that are nt. One f the cmpnents f the Fraud Triangle (cmpnents that lead t fraudulent behavir) is pprtunity. Dn t prvide an pprtunity fr fraud by giving access t yur mney! (By the way, the ther tw cmpnents are perceived financial need and ratinalizatin.) As a prfessinal bkkeeper, I wn t allw myself t be made a signer n a client s bank accunt r have access t their credit card. This gives me sme prtectin against suspicin if my client suspects fraudulent activity n any f their accunts. Yu shuld have a system f internal cntrls set up t mnitr the bkkeeping activity. Yur bkkeeper shuld prvide yu with financial statements at least quarterly, and mnthly is better. Review these fr reasnableness and accuracy. Review yur bank and credit card statements alng with the recnciliatin reprts. A bkkeeper may nt recgnize unusual r fraudulent activity and will simply bk it as an expense in yur bkkeeping system. If yu have business lans, review the balance shwn n the balance sheet with the balance n the lan statement. Yur bkkeeper shuld recncile these accunts mnthly, the same as the bank and credit card statements. Yu shuld understand all the balances shwn n the balance sheet, and mnitr activity in the equity accunts. It s a gd idea t develp a checklist f items t review this will speed up yur review prcess and make it easy fr yur bkkeeper t knw what t prvide fr the review. Selecting a Bkkeeper Once yu have decided t engage a bkkeeper, hw d yu g abut finding ne? Yur tax preparer r a fellw business wner may be able t recmmend smebdy. Mst majr sftware prviders (such as Intuit r Sage) have listings f bkkeepers n their websites, alng with a prfile f their level f expertise and areas f specialty. There are sme nline listings (such as bkkeepinghelp.cm), and f curse there are always the yellw pages. When yu start yur search, take sme time first t identify yur needs. D yu want mnthly reprts fr management purpses? Are yu nly cncerned with prviding yur tax preparer with reprts fr tax preparatin? D yu need payrll services? D yu need t file sales tax returns? What shuld yu lk fr? Here are sme things t check n: Educatin/Certificatin. Many bkkeepers dn t have a cllege degree, but it s gd t have sme training r certificatin. Many junir clleges r prfessinal rganizatins (such as the American Institute f Prfessinal Bkkeepers r the Natinal Assciatin f Certified Public Bkkeepers) have training and certificatin prgrams. Many bkkeepers hang up their shingle based n their n-the-jb experience, but this isn t as cmprehensive a training as ging thrugh ne f the educatinal prgrams. Certificatin is an additinal sign f cmmitment t the craft. There is n certificatin requirement fr bkkeepers, but knwing that yur candidate has taken the time and truble t get certified is a gd sign. If yu use a particular sftware package, als lk fr training and certificatin in that sftware. In Balance Bkkeeping Service 2015 Page 19

20 Experience. Training is gd but experience is als valuable. Lk fr a cmbinatin f training AND experience. Experience in the accunting department f a large cmpany, where the bks are reviewed and audited regularly by thse in the knw, will help a bkkeeper appreciate an accurate and clean set f bks. Area f expertise. Nt all bkkeepers specialize, but if yu are in a unique industry yu shuld lk fr smene with intimate knwledge f hw t accunt fr that activity Length f time in business. Mst bkkeepers wrk fr smene else, then g int business fr themselves. As yu knw, there is a learning curve when ging int business, s yu may want t lk fr smene wh has been in business fr themselves fr a year r s and has their prcesses established. Recmmendatins/Referrals. Yu can ask the bkkeeper t prvide referrals. Of curse, they will nly give yu names f peple wh will give them glwing recmmendatins, but at least they can cme up with thse names! Wrk Style. Hw d yu like t wrk with thers? D yu like smene wh is warm and fuzzy, r cl and prfessinal? Yu will be discussing yur finances with this persn, and ften accunting terminlgy can sund like a freign language, s be sure yu can cmmunicate with the persn in a way that feels cmfrtable t yu. Methd f Wrking. D yu need smene t cme t yur place f business, r can the wrk be dne remtely? There are s many ways f wrking remtely that many bkkeepers (me included) nw nly wrk frm their ffice and dn t g t custmer sites. If yu really feel that the bkkeeper needs t cme t yu, make sure that is understd up frnt. Availability. Des the persn have the time in their schedule t d yur wrk? D they have regular ffice hurs, r d they rely n vic and fr cmmunicatin? If the latter, are they cmmitted t returning calls and s within a specified time perid, such as ne business day? Price. This is a cnsideratin, but it shuldn t be yur nly criterin! A bargain bkkeeper is usually n bargain. If yu find smene wh is well qualified and has glwing recmmendatins, expect t pay a higher price. If they charge by the hur, the persn with the higher rate is likely t have the experience and tls t get the wrk dne faster and mre accurately, and may be less cstly in the lng run. In Balance Bkkeeping Service 2015 Page 20

21 Chapter 9 Cnclusin Nw yu have sme basic knwledge f what it takes t set up and maintain a set f bks fr yur business! I wish yu the best f luck n yur new endeavr. Remember that keeping a clse eye n the bttm line, and having a sund financial plan, will help yu t make yur business a success.

22 Chapter 10 Business Scenari Jim is starting a new business selling widgets. Sme f the imprtant infrmatin t cnsider when setting up his bkkeeping system are: Jim will perate as a sle prprietr He will buy widgets and resell them withut altering them in any way Widgets cst $1.50 each and will be sld fr $2.25 each Sales tax f 8.75% will be cllected n sales and will be paid t the state mnthly. Jim will use an inventry tracking system. This means that purchases f gds fr sale will be bked t an inventry (asset) accunt, and as the units are sld, they will cme ut f inventry and be bked t cst f gds sld. His suppliers will sell him the widgets and give him 30 days t pay. He will accept cash and credit cards Jim will rent space in a building at $750 per mnth, with a $750 security depsit. The security depsit is refundable if he leaves the space in gd cnditin when he is dne with it. He will invest $25,000 f his wn mney in the business He will buy stres fixtures (cunters, shelves, etc) csting $10,000. He will pay fr half f it with the mney he has invested, and finance the rest ver 3 years at 8% interest. Since this lan will nt be paid ff within the current year, it is classified as a lng-term liability. NOTE: since sme f the lan will be paid ff within a year, part f this will peridically be reclassified as the current prtin f lng-term debt. This is dne s that sme f the standard business metrics will be accurate. He will als buy cmputer equipment csting $2,500 that he will pay ff ver 1 year at 5% interest. Since it will be paid ff in 1 year r less, it is classified as a current liability. Jim has a business credit card that he will pay ff mnthly. Jim will nt have any emplyees. Based n these facts, Jim sets up this chart f accunts in QuickBks: In Balance Bkkeeping Service 2015 Page 22

23 The fllwing entries are recrded in January t get the business set up. Jim will be pen fr sales starting February 1. Recrd initial investment: Debit (dr) Checking Accunt $25,000 Credit (cr) Owner Investment $25,000 In Balance Bkkeeping Service 2015 Page 23

24 Pay first mnth s rent and security depsit Dr Rent Expense $750 Dr Rent Security Depsit $750 Cr Checking Accunt $1,500 Recrd purchase f stre fixtures Dr Furniture and Fixtures $10,000 Cr Checking Accunt $5,000 Cr Fixture Lan $5,000 Recrd purchase f cmputer equipment Dr Cmputer Equipment $2,500 Cr Cmputer Lan $2,500 Purchase 5,000 widgets fr resale Dr Inventry $7,500 Cr Accunts Payable $7,500 Purchases ffice supplies using credit card Dr Office Supplies $400 Cr Credit Card $400 At the end f January, Jim runs financial reprts. He has had sme expenses but s far, n incme, s his Prfit and Lss shws a net lss. Prfit and Lss Balance Sheet In Balance Bkkeeping Service 2015 Page 24

25 Statement f Cash Flws In Balance Bkkeeping Service 2015 Page 25

26 Cash flw is usually ne f the mst, if nt THE mst, imprtant issue fr mst small business wners. This reprt starts with Net Incme/Lss frm the Prfit and Lss Statement and then adds and subtracts activities that affect cash but aren t reflected in Net Incme in ther wrds, items that affect balance sheet accunts. It can be cnfusing because it ften includes transactins that didn t affect cash belw yu can see adjustments fr inventry and accunts payable. These ffset and were part f the same transactin (purchasing inventry n credit) and n cash was invlved but it still shws up as ffsetting adjustments n the reprt. On February 1, Jim pens his drs and starts ding business. During the mnth, the fllwing ccur: Jim sells a ttal f 4,000 widgets at $2.25 2,500 were sld t peple using credit cards 1,500 were sld t peple using cash $ f the credit card sales wasn t depsited in the bank until the first part f March $97.88 f the cash sales wasn t depsited until the first part f March In Balance Bkkeeping Service 2015 Page 26

27 Sales tax was cllected n all sales Jim buys anther 6,000 widgets fr inventry The vendr is paid fr the first shipment f widgets Rent is paid fr February The credit card is paid ff The lan payments are made: Fixture Lan Principal $ Interest $33.33 Ttal payment = $ Cmputer Lan Principal $ Interest $10.42 Ttal payment = $ The utility bill f $ is paid The phne bill f $120 is paid Jim writes a check t replace a damaged stre case--$85 Jim charges $250 f ffice supplies n the ffice credit card At the end f the mnth, t celebrate his first mnth in business, Jim takes several f his friends t the lcal pub and puts the tab f $ n his credit card. While business meals and entertainment can be 50% deductible as a business expense, there was n business cnducted at the celebratin and n custmers were invited. This is bked as an wner draw and nt as a business expense. T bad, Jim! Here is a list f the jurnal entries that were created in February t recrds the transactins listed abve: In Balance Bkkeeping Service 2015 Page 27

28 Nte that QuickBks uses a special accunt called Undepsited Funds is debited t recrd mney received frm sales. When the mney is depsited, Undepsited Funds is credited and the bank accunt is debited. It s a clearing accunt that allws gruping f receipts int a bank depsit that matches the amunt that is actually depsited t the bank and makes recnciling yur bank accunt much easier. If it wasn t used, each sale wuld be recrded as a separate bank depsit. If yu recrded 5 sales transactins in a day, yur accunting system wuld shw 5 depsits t the bank, when in reality the In Balance Bkkeeping Service 2015 Page 28

29 receipts fr thse 5 transactins wuld be depsited as ne depsit. Undepsited Funds lets yu batch the receipts int a depsit that matches yur bank statement. Here are the financial statements fr February: Prfit and Lss (including a YTD clumn) Balance Sheet In Balance Bkkeeping Service 2015 Page 29

30 In Balance Bkkeeping Service 2015 Page 30

31 Statement f Cash Flws In Balance Bkkeeping Service 2015 Page 31

32 Trial Balance This is included t demnstrate hw the net incme flws t the balance sheet. Nte that the trial balance includes all accunt balances, and the debits and credits are equal. On the Prfit and Lss, thugh, the debits and credits are NOT equal, with the difference between them being the net prfit r net lss (if the ttal credits are mre than the ttal debits, there is a net prfit; if the debits are mre than the credits, there is a net lss). The net prfit r lss is included in the Equity sectin f the balance sheet, which makes the debits and credits n the balance sheet be equal, where there are nt equal n the prfit and lss. A net incme will increase equity and a net lss will decrease it. Here s the balance sheet (nte the debits and credits are equal): Feb 28, 15 Debit Credit Accunt Type Reprt Checking Accunt 18, Asset Balance Sheet Inventry Asset 10, Asset Balance Sheet Undepsited Funds Asset Balance Sheet Cmputer Equipment 2, Asset Balance Sheet Furniture and Fixtures 10, Asset Balance Sheet Rent Security Depsit Asset Balance Sheet Accunts Payable 9, Liability Balance Sheet Credit Card Liability Balance Sheet Cmputer Lan 2, Liability Balance Sheet Sales Tax Payable Liability Balance Sheet Fixture Lan 4, Liability Balance Sheet Owner Investment 25, Equity Balance Sheet Owners Draw Equity Balance Sheet Sales 9, Incme Prfit and Lss Cst f Gds Sld 6, Cst f Gds Sld Prfit and Lss Interest Expense Expense Prfit and Lss Office Supplies Expense Prfit and Lss Rent Expense 1, Expense Prfit and Lss Repairs and Maintenance Expense Prfit and Lss Telephne Expense Expense Prfit and Lss Utilities Expense Prfit and Lss TOTAL 51, , Here it is with subttals fr the balance sheet accunts and the prfit and lss accunts. Nte the credits n the Prfit and Lss accunts are mre than the debits by $451.24, resulting in that amunt f net prfit. Als nte that this is the ttal fr the year, nt just the mnth f February; the Net incme shwn n the balance sheet is always the amunt fr the current year. Feb 28, 15 In Balance Bkkeeping Service 2015 Page 32

33 Accunt Debit Credit Net Reprt Checking Accunt 18, Balance Sheet Inventry Asset 10, Balance Sheet Undepsited Funds Balance Sheet Cmputer Equipment 2, Balance Sheet Furniture and Fixtures 10, Balance Sheet Rent Security Depsit Balance Sheet Accunts Payable 9, Balance Sheet Credit Card Balance Sheet Cmputer Lan 2, Balance Sheet Sales Tax Payable Balance Sheet Fixture Lan 4, Balance Sheet Owner Investment 25, Balance Sheet Owners Draw Balance Sheet 42, , Balance Sheet Ttal Sales 9, Prfit and Lss Cst f Gds Sld 6, Prfit and Lss Interest Expense Prfit and Lss Office Supplies Prfit and Lss Rent Expense 1, Prfit and Lss Repairs and Maintenance Prfit and Lss Telephne Expense Prfit and Lss Utilities Prfit and Lss 8, , Prfit and Lss Ttal 51, , Grand Ttal Nw take a lk at the financial statements. Nte that the Prfit and Lss shws a year t date net incme f $ and the balance sheet reprts that amunt in the equity sectin as well, causing the balance sheet t be in balance. In Balance Bkkeeping Service 2015 Page 33