I have QuickBooks®, NOW WHAT?
FOR THE SELF-EMPLOYED!
Copyright © 2005, 2007 Julie A. Mucha-Aydlott
San Diego Busine...
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I have QuickBooks®, NOW WHAT?
FOR THE SELF-EMPLOYED!
Copyright © 2005, 2007 Julie A. Mucha-Aydlott
San Diego Business Accounting Solutions
All Rights Reserved.
A “Non” CPA Firm
First Printing: October 2005
P.O. Box 1128
Second Publication: May 2007
Lakeside, Ca 92040
I.S.B.N. (13) 978-0974124-0-0 Replaces I.S.B.N.
0-9746093-5-8 Julie A. Mucha-Aydlott
Published by: San Diego Business Accounting Solutions – a “Non” CPA Firm P.O. Box 1128 Lakeside, CA 92040 Printed in the United States
Graphic Design: Urick Designs
The contents of this book reflect the author’s views acquired through her experience in the field under discussion. The Author makes no representation or warranties with respect to the accuracy or completeness of the contents of this book and specifically shall in no event be liable for any loss of profit or any other damages including but not limited to special, incidental, consequential or other damages.
If those of you notice a typo or grammatical error here and there, my apologies. I’m only human. Each publication does go back through an editing process. I cannot guarantee that all misspelled words are caught. The reason I choose to self-publish my books is so that I can write them in a language that the other 70% of the US speak. My clients do not always speak with proper grammar, so if my books contain grammatically incorrect usage, it’s so the writing will be closer to the way my clients and I actually speak..
About the Author
In 1994 I opened my own Accounting Service because I, like many other aspiring individuals, cannot work for someone else. I work well with others, but require the respect and freedom that self-employment brings. With over fourteen years of accounting experience, I have gained the respect and drive that I have searched for. I am not going to write this bio in the third person. I am writing this to you as if I was sitting at your office teaching you in basic layman’s terms what steps you need to set up your business bookkeeping system. I am not your typical accountant. Descriptions and criteria do not need to be so in-depth that you lose the most important person that you are trying to explain it to. I am a white-collar suit who wears a blue-collar hat. On one day of the week I can pick apart financials and accounting data to uncover discrepancies, or create financials from boxes of receipts to obtain business loans for clients, and then the next day, I’m wearing my shorts and a T-shirt trying to be a laborer or, “the new guy,” as they call me on my husband’s jobsite. Just because you have a title that seems so intimidating because you deal with numbers and money, doesn’t mean that you need to intimidate your clients. It’s just a title, and frankly I use “Bean Counter” more than anything. I do claim to be an expert in my field of discussion, because I have set up, cleaned up, and made into perfection my clients’ wishes with their books. Now that California is in such a financial crisis, my clients who are the smaller businesses, the blue collar workers who are trying to succeed in a corporate world, can no longer afford accounting fees. I wrote this book for them, the ones who can do it on their own, and do it right if they have the simplified direction. It has my brain, my humor, my sarcasm, everything that makes me “not the typical” stereotyped Accountant. If anything, all I wish is that you can walk away from reading this book with more knowledge and understanding
for business and how your books should look. After I am finished with this book, I am continuing my search for bigger, better, farther, and faster. I’ve completed everything that I can up until this point, and have changed the direction of accounting that I offer. I have always been a more analytical accountant instead of being so systematic that it’s no longer fun. Fun? What kind of a sick person would even think accounting is fun? I am continuing my education for the investigative and analytical side of accounting to become a C.F.E. (Certified Fraud Examiner). Now that ought to keep me on my toes. I want to give a great big thanks to my husband who put up with me starting something new again, and my two little monsters who let me type at night. I would also like to give a thank-you to Paul and Sarah Edwards, whom I met in a chance encounter and who gave me the enthusiasm and ambition to start another project.
My complete best wishes to you and your success.
Julie A. Mucha-Aydlott
Table of Contents Introduction Chapter 1:
Where to Begin
Setting Up Your QuickBooks® File Creating your Chart of Accounts
Entering your Startup Costs Entering Existing Business Costs
Creating your Company Budget & Cash Flow
Bookkeeping Maintenance 9 Checking and Cash 9 Accounts Receivable 9 Sales Tax 9 Accounts Payable 9 Credit Cards 9 Petty Cash 9 Fixed Assets 9 Inventory 9 Job Costing 9 Bank Reconciliation
111 113 121 145 153 166 174 175 181 186 207
Employees and Payroll Sub-Contracted Employees
Bookkeeping Monthly Reports Quarterly and Year End Reports Real Filing
270 287 289
Business and Personal Taxes
Mistakes to Avoid 318 Troubleshooting Guide Stupid Questions (It’s what you say when you call me: “Sorry to bother you, I have a stupid question.”) Helpful Phone Numbers and Website Links Index Glossary
333 334 337
Many small business owners or new entrepreneurs start their business with one thing in mind, their product or service. Not everyone is an accountant, and frankly most people don’t like accounting. Accountants really do get a nerdy rap. It’s easier for the business owner to drop their records at my doorstep or the door of my fellow associates, and not concern themselves with the box of receipts. Times are changing, though, and more and more home-based businesses and small businesses can’t afford our expensive fees; so they think they can do it themselves, yet they don’t know how. Everyone’s prices are going up, and it seems much more difficult to hold on to every dollar that you make. I make the most money when you don’t understand your businesses finances, and your books are always proof of that. The more lack of knowledge that you have, the more time per hour I spend on your account, which does add up rather quickly. So why would I tell you how to do it? Because the number-one mistake a business owner makes is to not know their bookkeeping, and this will end up in the failure of their company. A profit and loss form is just a paper trail of how much money you earned and where it went. It isn’t as scary as all the numbers flying off the paper at you. Look, the worst thing you could do for your one-of-a-kind business idea that has so much potential is to not be involved and understand your own books. If you don’t know how to keep your own books, how could you possibly uncover mistakes or know what your bookkeeper is doing? This instruction guide will show you step-by-step how to set up and operate your own computerized bookkeeping system, and understand what it is you are creating, and why you’re creating it. There are a lot of books out there that will teach you the basic fundamentals of accounting and bookkeeping, and they are excellent books; however, from the past 14 years of experience with my clients who are manufacturers, cabinet makers, general contractors, bar keepers, attorneys, and more from just 6
about every industry, the bottom line is always the same. Trying to teach a new job to someone who is already overloaded with work is very difficult. It needs to be presented in layman’s terms, comprehensible for the standard Joe who is the small business owner to understand without throwing his or her hands up and walking away with more frustration than before you opened the first page. Now throw computerized bookkeeping on top of it all, and you’re looking at individuals who literally think the computer is going to blow up if they press the wrong button. Unless you plan on becoming a CPA or a CFO of a large Corporation, there really is an easier way of understanding a debit and a credit. Just not in accounting lingo, but in layman’s terms for the vast growing number of America’s small businesses.
Chapter 1 Where to Begin
Depending upon what stage of operation your business is at, whether it is brand-new or you have been in operation for a while, I will go back to the basics of starting a new business. Get a pad of paper handy, because you need to answer these questions for yourself to understand who and what you are. All of these items are important in order to figure out what system of accounting would be best suited for you. Setting up a new business 9 Why type of business are you? Are you a service company, do you manufacture a product, are you a retail store, consultant, or a contractor? 9 Are you opening this business by yourself, or will you have a partner? Is it a franchise, or did you buy it? 9 Small businesses generally start as a Sole Proprietor: “a business owned by one person.” 9 If you have a partner, make sure you’re both aware of the tax filing requirements. A Partnership return costs just as much to prepare as a Corporate Tax Return because of the complexity. Partnerships are not protected as a corporation, though, and all partners can be sued. Also, if you operate your business jointly with your spouse, it is not a Sole Proprietorship even though you file your tax return jointly. You now have a partnership and must file accordingly. 9 Should you incorporate, and why would you? o To protect your personal assets. We all know how sue-happy this country has become, and a big benefit of holding on to your personal assets is to take the burden of self-employment from your name to your corporation’s name. 8
o General Corporations are filed as a C-Corp, S-Corp, LLC (Limited Liability Corporation) or LLP (Limited Liability Partnership). The difference is: x
C-Corp is double taxed; the corporation pays tax on its earnings and the shareholders pay taxes on those distributed earnings. And we thought double taxation was against the law. . . . Unless you’re as big as Enron® or Worldcom® and can get away with tax evasion, then an S-Corp would be best suited for your needs and tax advantages.
S-Corp is really the same as a Sole Proprietorship; however you are protected by the corporation. Your net profits are considered capital distributions and your profits are not taxed through the corporation, yet flow through to your personal income tax return on a K-1. This will save you thousands of dollars in Self-Employment tax.
LLC. The Limited Liability Company (or LLC) is not a partnership or a corporation. An LLC is a distinct type of business that offers an alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the partnership advantage of passthrough taxation. In layman’s terms, it is best used for a partnership to protect all investors without the tax consequences of a general partnership.
o The old Self-Employment tax for Sole Proprietors. 100% of your profit over the $400 minimum is taxed at 15.3% of your Net Profit. When you’re a Corporation, you have to draw a set salary (for which Employment Tax is taxed at 15.3% FICA and Medicare) and the net profits after your salary, instead of being taxed at 15.3%, are taxed as a capital gain. Example:
You’re a Sole Proprietor and at the end of the year after all expenses are deducted from your income, you made $45,000 profit. Keep in mind an owner draw is not an expense. You are really advancing the money from your profits, which is what you earned, thus meaning your Net Profits. Your Self-Employment tax liability would be $45,000 x 15.3% = $6,885. That is just Self-Employment tax, not Federal Tax or State Tax.
You’re an S-Corp and you took a $24,000-per-year salary from your net profits of $45,000. You would pay FICA/Medicare out of your paycheck at 7.65%, and the Company is required to match it at 7.65% (which is Self-Employment tax), so $24,000 x 15.3% = $3,672. Your new Corporate Net Profit is $45,000 – $24,000 = $21,000, with 0% Self-Employment tax liability, giving you a tax savings of $3,213. ($6,885 minus $3,672 = $3,213). The reason why your net profits are now only $21,000 is that you are able to Expense (write off) your salary, and we know that an expense reduces our profits. Remember before that with a Sole Proprietorship your Owner Draw is not an Expense? However, a Salary is.
9 So, what is the best decision for you and your company? My opinion and suggestion depends entirely on the type of business that you are. If you are manufacturing a product or are in the construction industry, I would say, hands down, incorporate. Those are the two biggest industries that hold the highest liability and lawsuit claims. All it takes is one human error, and everything you’ve worked so hard for is gone. Otherwise, ride out the Sole Proprietor train for a few years and when you start making more of a profit, then investigate incorporating. You can always do it later. If you choose to do it now, there are companies online that do it for a much smaller fee than an attorney or an accountant charges. You can pay anywhere upwards of $5,000 to incorporate a business, but
honestly it only costs a few hundred to process, depending on the complexity. One place to look is www.bizfilings.com. They can incorporate you in any state for a minimal fee. 9 Accounting Methods: what type should you be? There are two types of accounting methods that are generally used. o Cash – Cash earned and received within a fiscal year. Cash is the best method to use for small businesses that are a service company, a retail store, restaurant or bar. You don’t necessarily track your bills due in large sums (your Accounts Payable); and you file your tax returns based upon how much money you received from your customers. o Accrual – Income earned in a fiscal year, but not yet received. This means you billed your customer for the product or service, but they haven’t paid you yet. If you track large Accounts Receivables (customers’ invoices due) or Accounts Payable (vendors’ invoices that you have to pay), the Accrual method has its definite benefits. You don’t necessarily want to pay for income that you have not yet received. The flip side is that if at the end of the year you have large vendor bills that came in the mail in December, but you have thirty days to pay them, they would be accrued and applied to December’s financial statements, which would reduce your tax liability. Had you used the Cash method, you would not be able to use that expense on your tax return unless you paid it immediately. (Writing a check out of your checking account and sitting on it for three weeks doesn’t count either if there aren’t enough funds to cover that check.) 9 Company Fiscal Years – Each Company is created different, yet the accounting principle is still the same. A fiscal year is the accounting year in which the company records its Income and Expenses. Most companies use a calendar year of January to December. When you get into bigger Corporations, depending on the incorporation date, their fiscal 11
year could be from October to September, or August to July. It is still in 12-month increments, but the calendar for earnings is recorded differently. Thus, their company tax return is filed at a different time of year than what the general public is accustomed to – April 15th, for individuals and Schedule C Returns (Sole Proprietors). The tax deadline date for Corporations (depending on what fiscal year they are using) is March 15th. Accounting is also separated by quarters. It is usually used for Financial Institutions and Tax Agencies for receiving their financial reports, or tax reports and payments. The Quarters are separated as follows: 1. Jan-Mar is your First Quarter 2. Apr-June is your Second Quarter 3. July-Sept is your Third Quarter 4. Oct-Dec is your Fourth Quarter 9 Always remember those quarters if you already don’t know them! Payroll Tax Reports, Estimated Tax payments, Sales Tax Payments, and Financial Packages are always due by the last day of the following month preceding the end of a quarter. Example: Payroll Tax Form 941, 1st Quarter is Jan-Mar 31st and is due by April 30th. Your estimated tax payments are due the 15th day of the month preceding the end of a quarter. Sales tax reports and payments are due quarterly, depending on the amount of collectable sales tax in your state. If you process a large taxable sale each month, the State Sales Tax Agency will require a monthly tax deposit along with the quarterly tax filing. 9 Apply for a Federal Taxpayer Identification number. The bottom line is, do you want your Social Security number on everything? The less other businesses, agencies, vendors and customers know about your personal life, the better. It is way too easy to let people have access to your personal financial life with just one Social Security number, yet it
takes years to correct an error on your TRW. Unless you have to personally guarantee a note, get a Federal ID Number so your Social Security number is protected. You can apply online at http://www.irs.gov/businesses/index.html; scroll down to “Topics” and select “Employer ID Numbers.” 9 Once you receive your business license and have your Taxpayer ID Number, you can open a checking account at your local bank. When you’re first starting your business by purchasing assets and operating tools, it is okay to use your personal checking account to pay for these items. However, once you open your business bank account, DO NOT write your mortgage check out of your business account. Steer clear from using your business account for personal bills. I cannot stress enough to keep them separated. The cleaner your books are, the less likely you’ll be involved in an ugly audit. Please keep in mind that if you have a credit card, gas card or some type of loan payment in your personal name, yet it is used for business, it is still a business expense. It is the same as personally guaranteeing a business note. 9 The big question of the day is, are you scared of a computer? Most clients are terrified of accounting software and are so afraid that they are going to break it. The worst thing that will happen to you is that you really can’t figure it out and end up hiring an accountant or bookkeeper to fix what you tried to create, and they’ll secretly laugh at you as they’re correcting your books. Well, I may be exaggerating a bit, but I have cracked a smile a few times. . . . There is one software program that I recommend. QuickBooks Pro® is the number-one small business accounting software because it’s created for small business owners, specifically non-accountants. If you go with the lowest-end version of QuickBooks®, it’s still very basic bookkeeping. Their software has become much more complex, so if you choose their Point of Sale for Retail or Contractors versions I do recommend taking a tutorial class to help you understand those versions. Then there is 13
Peachtree®, which works very well if you have a product business that needs to track inventory. However, QuickBooks® is constantly updating their inventory abilities. Peachtree is more complex and isn’t easy to follow if you don’t understand basic bookkeeping, so I highly recommend taking a tutorial class for any use of Peachtree Software.
QuickBooks® basic edition is around $199.95, but before you buy the software you need to understand the differences between versions, and choose the version of software you need to use for your business. Order the QuickBooks® Pro Trial Software from Intuit. You can order online at www.quickbooks.com or call their toll-free number: 888-2468848. You have 15 uses on the disk before you have to go out and purchase your own software. QuickBooks Pro® has many more functions, such as estimating, in-depth job tracking, tracking employee time, and much more. This version is $299.95. QuickBooks Pro® has gotten much more expensive because of the possibilities with the software. It is worth the extra money for the convenience. The software is growing with the clients’ needs, rather than the client outgrowing the software within three years. If you are just starting out, and you are a small home-based business only tracking invoicing and payables and wanting general financial reports that show you how much money your business is making or losing, go with the QuickBooks® Basic Edition. You can always upgrade it later, and the upgrade is not as expensive as the software. You can also purchase QuickBooks® or QuickBooks Pro® on E-bay if you can outbid the competitor. An older version of QuickBooks® is just fine as long as you make absolutely sure that it’s not an upgrade version and it’s no older than QuickBooks® 2000. If the software you purchase on E-bay is an upgrade, when you go to install it, it will search for the original software, which does not exist on your computer. It will not 14
import the upgrade because there is nothing to import it to. You must also make sure any used version of QuickBooks® that you purchase isn’t pirated. You will not be able to get updates, tax tables or customer support. o This instruction guide was written mostly to help you understand small business bookkeeping using QuickBooks Pro®. The pictures, templates and QuickBooks® instructions illustrated in this book can be used for all QuickBooks® versions from 2001 and later. Intuit® does not intend to change the format (look) of the software. The annual upgrades to the program are to increase its potential and improve an already great program. If you are going to use the old-fashioned manual bookkeeping with ledger pads and an old metal filing cabinet, I do recommend the wave of the future, using a computer, because you will get the work done in more than half the time, and time is money. Think about that, the next time you wait in line at the store to return a defective product that cost you a dollar. 9 Designate a certain amount of time per week to process your bookkeeping. You need to write yourself into your calendar, too, and unless you can pay me $65 per hour to come to your house and clean it up, then get used to the idea of handling your bookkeeping. Most small businesses can’t afford to hire a bookkeeper or an accountant, which is why you’re buying this book. The flip side to that scenario is the small business owners who have achieved the next level of financial income to where they can afford to outsource their accounting, but who make the mistake of not involving themselves in their books. If they don’t understand what they’re looking at, how do they know that their money is safe? In this day and age, everyone seems to be more interested in the quick and easy way to get money. That includes embezzlement in all sorts of shapes and sizes. If you are blind to your money, you’re wide open to fraud. You’re also responsible for the numbers on your 15
paper, especially when they’re submitted to the IRS on your tax return. Realistically, any number entered on your profit and loss by a bookkeeper or CPA that is bogus, whether you know it or not, is 100% your responsibility. The IRS will hold you accountable. Wouldn’t you rather know what the numbers are? 9 What you will need to have and to know to set up your computerized bookkeeping and budgets: o Computer – IBM Compatible, 350 Megahertz with 64 Megabytes of Random Access Memory. Hard drive with at least 200 Megabytes of free disk space. CDROM Drive, Windows 98, 2000 or ME. 256-Color SVGA Monitor with Resolution of 800 x 600, and finally, the ability to program your VCR clock. (Okay, maybe that last one was a joke, but I hope that was the most confusing part of this book, and it has nothing to do with me or accounting!) o Accounting Software – QuickBooks® recommended o Microsoft Excel® – (If your computer only has Microsoft Works®, you can open my spreadsheets using Works by selecting File, Open as, and when you locate the file under your CD drive, change the file type from Excel® to Works document. When you’re finished using the file, save it as a Works® File; see page 85). o Business Type
Sole Proprietor _____
Corporation _____ Type _____
o Product or Service
Service Company _________________
o Accounting Method
o Fiscal Year
January through December ________
Are you going to hire employees? ________
Are you going to hire sub-contractors? __________
o Taxpayer ID Number
o Did you borrow money to start this business?
Bank Loans _________________
Personal Loans _______________
Used Credit Cards _____________
Personal Savings ______________
o Cash and Credit Card Receipts
Gather all receipts that you have for business expenses and put them in order by x
Credit Card (if more than one credit card, separate by account number)
Designate your credit cards by personal and business use. Try not to use a credit card for business that you use for personal items.
This way it’s much easier and cleaner to reconcile and post charges. x
o Do you have a vehicle that you use for business?
Is it a lease? ________
Is it a loan? ________
Do you own it outright? ___________
Get the lease, loan papers or sales receipt _________
o Get a filing cabinet and a one-inch, three-ring binder. If you throw your paper in a box and don’t file it accordingly, it gets ugly, messy and harder to prove what your business expenses are.
Kids between the ages of seven and fifteen can make labels and file really well. If you have them, put them to work. (Keep in mind that you can only pay family employees if you file payroll taxes, so if you don’t have any employees, you’ll just have to give them an allowance.)
If you are already operating a business and want to computerize your books and understand your bookkeeping, it is still important to answer those questions listed above. There are additional questions that you will need to answer for yourself. 9 When did you open your business? ___________ 9 How far back do you want to track your business finances? o How much time do you have to enter data in the computer? o Is it worth the time? Yes it is, it could save you hundreds and even thousands of dollars in bookkeeping and accounting fees to hire an outside service to do it for you. How rich do you feel?
o If it were only a few months, it wouldn’t take that long. Depending on what month of the year it is, it is pretty time-consuming to go back and enter all of your income and expenses. You will be more comfortable than Joe with the program because you had more data to enter in, and knowing what your business is doing in dollar terms is a relief. 9 Do you have open Receivables? ____________ o Did you send any of your customers or clients a bill on an Office Depot invoice template that is lying somewhere on your desk? o How much money is still due to your business on those invoices? 9 Do you have Employees? ____________ o Are you processing payroll through a payroll service? o Are you paying sub-contractors or consultants? o Are you paying commissions? Gather all of your paperwork together with all of your business notes, and let’s start by creating a QuickBooks® Company File for your business. You’re going to have a million questions, so write them down as you go. You would be surprised at how much you might already know without having to ask an expert. During this process of setting up your accounting, give yourself more credit than you think you deserve, because by the time you’re finished, you will deserve it.
Chapter 2 Setting up Your QuickBooks® File Install your trial software or your complete QuickBooks® software to your computer hard drive, normally drive C. As I mentioned, you have 15 uses on this disk before you have to buy your own software. After the install is complete, you will have to restart your computer. QuickBooks® will automatically prompt you to do this. Once your computer has rebooted, you should see an icon on your desktop that looks like this –
Double click on the icon and it will take you into QuickBooks®. You will see a screen that says “No company open.” Click on the icon that says “Create a new company.”
“Create a new company” icon.
This is going to take you through the easy interview. Follow the instructions, and enter in the detail of your business as you proceed through the questions. They are easy questions: What is your business name? What’s the address? Are you a Sole Proprietor, Corporation or Partnership? Your tax year is January unless you incorporated on an odd date, in which case you would type in the fiscal month you were qualified for with the IRS. Otherwise both 20
boxes will fill in January. If you don’t have a Taxpayer ID Number yet, just put in your Social Security number. Your company income tax return would be a Form 1040 – Sole Proprietor, unless you are a Partnership, Corporation or Non-Profit company. Once you get to the “Type of business” screen, look at your notes and find the business closest to the type of service or industry that you are. If you can’t find yours, select the closest business that would match. It’s not a major crisis or the end of the world if you can’t find yours, so select the closest match. The only difference in tracking your business type would be the chart of accounts and how they are set up, and you can change them once your data file is created. After you have selected the business type, QuickBooks® will create your file, and then it will ask you if you want to use these accounts or make your own. Just select “Yes,” and use those accounts. You can change and modify the accounts after the setup is complete. Depending on how computer-savvy you are, you must remember where you saved this file too. QuickBooks® will automatically save it to your Intuit File located on your C Drive under Program Files. You need to know how to get there if you ever have to manually open QuickBooks®. QuickBooks® will, however, automatically pull your accounting file open when you double-click on the QuickBooks® icon on your desktop. You remember, this one.
Follow the rest of the questions and answer them to the best of your knowledge. Are you going to let anyone else help you with your bookkeeping? If so, do you want to set up security passwords and user names? If you track inventory for your business, you can set it up with QuickBooks®. Keep in mind that any selection you make during this process can be changed after the file is created. You can choose the invoicing template that you wish to use for your clients or customers. Are you going to have employees? Intuit® charges a fee to 21
assist with the payroll service, and charges you an annual fee for the payroll tax table updates so that your payroll is correct. It’s generally around $129 per year for the tax table service, and the payroll service depends on how many employees you have. You will learn more about payroll when you get to that chapter. I suggest that you enter your bills, then pay them so you can budget your money better. You can select “No” on setting up additional item accounts, income accounts and expense accounts, because I want you to manually do it so you understand what you’re doing. Once the interview is complete, you need to click on “Leave.” This will bring you to the QuickBooks® data file that you just created. It may look unusual and scary, but it’s not as bad as you may think. Once your QuickBooks® data file is created, you are ready to start your bookkeeping.
9 Setting Up and Understanding your Chart of Accounts The first rule in setting up a proper bookkeeping system is to familiarize yourself with a Chart of Accounts. Think of your chart of accounts as a great big filing cabinet; inside the filing cabinet you have a bunch of manila (yellow) folders with labels on them for each account that your business will use. Your Chart of Accounts (filing cabinet) consists of all of your asset accounts, such as bank, cash, receivables (customer invoices due), fixed assets (vehicles, office equipment, shop equipment), notes receivable (money that the company lent to someone else, like an employee, or your cousin who quits his job and is crying the blues); all your liability accounts, such as accounts payable (money you owe vendors), loans, Credit Cards, and payroll taxes; all your equity accounts, such as capital contributions, distributions (owner draws) and net profit; all your income accounts; and of course your expense accounts. Each one of those accounts (yellow files) will hold the explanation of your businesses life in dollar terms broken down by category.
The QuickBooks® data file on your business that you just created is lacking many accounts. To pull up your Chart of Accounts, from the Top menu bar at the very top of QuickBooks® select Lists; the top item on the list will be your Chart of Accounts. Or you can click on the icon that says “Accnt.” Those icons are directly under your top menu bar list. This will pull up your Chart of Accounts.
These names are your top menu list.
Your QuickBooks® Chart of Account icon.
Scroll through the accounts to see what is listed in there. You will see a lot of expense accounts, a few income accounts and not many assets or liabilities. This is because you need to manually create those. I have created a QuickBooks® Company called Joe’s Home Based Business. Joe is a Service Company. The next page is the Chart of Account from Joe’s new QuickBooks® file.
Your first set of books are limited in the accounts that QuickBooks® has set-up.
The first column is your actual account name; in this list would be the names that are printed on your yellow file folder labels in the Chart of Accounts filing cabinet. The second column is the account type. In order to track your company financial records, your accounts are set up by type, which is a description of their purpose. Are they a cash, liability, equity, income or expense account? The third column which displays your balance total would only show an amount if it is an account that is not associated as an income or expense account and has a revolving balance (anything with value or liability like a credit card). Your fourth column is the description, which is pretty self-explanatory. It describes what is “inside” your yellow file, and most likely will be the same name as your Account Name column. The fourth column is your tax-line. This column is only used by small business owners if they intend to use Turbo Tax® and import their data from QuickBooks®. I highly doubt you will do this because of the complexity of preparing tax returns and understanding the ever-changing tax laws. Also, if just one account has one letter misspelled, Turbo-Tax® will not recognize it; so unless you want to throw your computer out the window, don’t worry about this column. QuickBooks® doesn’t need it to run. Now that you can see what your Chart of Accounts has, we need to add what it doesn’t have. There are shortcuts that you can take in QuickBooks® to add new accounts without having to click all the way to China. I want you to make sure you’re still at your Chart of Accounts template. If you’re not, from the Top menu bar at the very top of QuickBooks®, select Lists, and the top item on the list will be your Chart of Accounts. Or you can click on the icon that says “Accnt.” When you’re setting up the rest of your Chart of Accounts, you need to consider what you are going to use. We all know we need to have a business checking account. We are going to want to track our Accounts Receivable, and in this day and age, you’re going to use your credit cards for business purposes. Did you already purchase assets for your business, such as a computer,
desk, filing cabinet or software? If you are in a manufacturing industry, do you have equipment? Did you pay cash for it, charge it to a credit card, or get a loan? I want you to go to your top menu bar (the source names at the top of the QuickBooks® window: File, Edit, View, List, Company, etc.). In each of those categories are subcategories that you will familiarize yourself with as time progresses. Click on Edit. (It’s the one next to File). There are a number of items that you can edit in the screen you have opened. You want to select New Account.
Top menu Select Edit, New Account
If you don’t see these accounts in black, it’s because you need to have your chart of accounts screen open. To get to that screen, click the Accnt icon
Notice that there is a prompt next to it that says “Ctrl N”; this is a short cut to make a new account. Much easier than going to China. If you’re feeling brave, hit your CTRL key, it’s the bottom left key on your keyboard (well, on my keyboard). At the same time you’re pressing the CTRL key, strike the N key. You will now be at a screen that says New Account. This is the most important part when you’re setting up your Chart of Accounts, the account type. Picture your filing cabinet now, and you just threw all of your yellow files in there without labels and in no specific order. Your files and accounts need to be tracked for specific reasons. Those reasons are called “How much money do I make,” “How much money do I spend,” and “How much money am I worth?” If you don’t file things correctly, you’ll never be able to answer those
questions or find anything. If you notice on the New Account Template there are fifteen account types that you can choose from when you’re adding your new accounts to QuickBooks®.
These are your account types.
In layman’s terms, the account types are as follows: The following are your Asset accounts – An Asset is anything of value that is owned by you (your business). It gives you worth. 1.) Bank – Bank generally means cash accounts, such as your Checking Account, Savings Account, Money Markets, and Petty Cash. Anything that is liquid, and not just a number on a piece of paper. 2.) Accounts Receivable – These track charges for services, merchandise or any billable item that you are allowing your customer or client to pay for over a period of time (generally 30 days). You must track your Accounts Receivable so you do not forget who owes you money. You do this by creating Invoices rather then creating a Cash Sale Slip. 3.) Other Current Asset – These are other items of value that your company has, such as an advance given to an employee with the intent that the employee will pay it back, or a loan your company gave to another person or entity. These assets are assumed to be paid back in a short period of time. 27
4.) Fixed Asset – Your fixed assets consist of any valuable item that has a useful life, such as your computer, office furniture, fax machine, vehicle, shop equipment, etc. All of these items must be depreciated over the life of the asset. How will you know the life of your asset? Chapter eight includes a list of assets, which must be depreciated; but honestly, it’s in your best interest to find a Tax Preparer to save you thousands of dollars in missed deductions if you prepared your own return. Your Tax Preparer or CPA will depreciate your assets for you, but that doesn’t mean you don’t need to know what the asset life is or what account it should go to. 5.) Other Asset – These assets are assumed to have a longer time-frame of hanging around without reimbursement, such as a deposit made for a Rental Lease on business property.
The following are your Liability Accounts – A liability is a financial obligation to another entity, whether it is a vendor, bank, or your mother-in-law. 6.) Accounts Payable – These include bills due to vendors, sub-contractors, utility and phone company, anyone to whom your business assumes a financial obligation for services or goods. 7.) Credit Cards – These are obviously your credit card accounts that you use for business not personal expenses. Separate the two. It’s much easier to track your expenses if you don’t have to remove three pages of personal purchases from a credit card statement. 8.) Other Current Liability – Your other current liabilities are like your current assets; they are short-term liabilities that will be paid off in less than a year, such as Payroll Taxes, and Sales Tax. 9.) Long Term Liability – These are loans that you have taken out for business purposes, such as a lease on equipment, a car loan or a business credit line, which take longer than one year to pay off. 10.) Equity – Equity is the dollar amount of your assets minus your liabilities, giving you your net worth. To calculate your business’s Equity you must also account for that dollar figure by 28
creating your equity accounts, which are Owner’s Capital Contribution (money you gave to the company to operate), Owner’s Distributions (money you took from the company profits so you could pay your mortgage), Equals Retained Earnings (accumulated earnings that have not been distributed to the company shareholders and are “sitting” on the books). Think of retained earnings like retaining water: you drink a soda with an enormous amount of sodium, no good; your body dumps the water because it uses it to process your day’s low-impact activity, but the salt is still in your body unused and retained. 11.) Income – We should all know what this is. It’s that hard-earned dollar that we try so hard to keep. Income, however, on our Chart of Accounts is direct earnings from your business operations. For instance, Joe’s service company could have a number of Income Items. Let’s say that Joe is an Internet Service and provides Web Hosting and Design. His Income Account would say just that, so that he could track how much money he made in each income category. 12.) Cost of Goods – These Costs are direct expenses from your service, product, or business operation: like Joe’s software to create Web design, his server to host websites, repairs and maintenance on his equipment, and his sub-contractors or employees if he has any. (You are right, depending on the cost of the software and definitely the server, they are fixed assets, but the depreciation is booked to Cost of Goods, Depreciable Assets) 13.) Expenses – We all have them, and they all sound legitimate, but be careful about what you think is an actual tax deduction or what is wishful thinking. Your Expenses are direct overhead of your businesses operations, such as office supplies, dues and subscriptions, auto expenses, etc. 14.) Other Income – Of course just about any income is taxable; this is generally Interest Income from a savings account the business holds. 15.) Other Expenses – This account is used for Income and Expenses that are generally not taxdeductible: a parking ticket you got downtown, 50% of your meal expenses that you used to wine and dine a client, little things like that. 29
Now that we have familiarized ourselves with the list of account types, let’s start creating your company’s additional Chart of Accounts. The first one you obviously need to start with is your business checking account. If you closed out of the screen that says create a New Account, remember the shortcut – hit your CTRL N and the screen will pop back up; otherwise click Edit, New Account.
Your account type, it is cash, liquid, “ie” bank.
Do not enter an amount here. You need to learn to set-up your prior balances the correct way!
Your bank account does not need a subaccount. After creating your new account, click next to set up another account.
The account type for our Checking will be Bank. Under account name, it entirely depends on how many accounts you will have, but I always have the bank name included; my account reads Checking – Wells Fargo. The next button says Sub-Account. A Sub-Account is an account that is connected to the main account for financial tracking purposes. I’ll explain more when you set up your credit cards. Your bank accounts do not need a sub-account. Type in Description, Checking Account, and then type in your Bank account number on the next line. Now remember the tax line is not important unless you’re going to import your QuickBooks® to TurboTax®. I doubt you will, so it is okay to leave the tax line blank on all accounts that you set up. The next line is very important. It says Opening Balance. QuickBooks® is asking you for the dollar
amount that you opened the checking account with; or, if your company already exists, the dollar amount that is currently in your bank after all checks and deposits have cleared. I do not like this account. It automatically transfers any dollar sum that you open a new account with to a Chart of Account called Opening Balance Equity. This is really just a messy yellow file stuffed with a bunch of incidental junk and doesn’t give an accurate picture of where your opening balance equity came from. It is an account that is impossible to clean up and reconcile, so please don’t put in a dollar amount. We will do the proper steps by making a deposit into your QuickBooks® checking account like the good bookkeepers that we are. Also, please make sure you order computer checks; it’s cleaner and easier than hand-writing checks. There is a company in New York called CheckFamous.com. You can get your checks for 50% less than from Intuit®, Office Depot, or even McBee (I’m very sorry Rita, you’re still my favorite sales rep). If your budget is tight, these checks cost less than the ones the bank will give you when you open your account. Okay, now you can click the Next button on your New Accounts Screen. You don’t necessarily want to click okay if you’re creating more than one account, because it will close you out each time you click okay, and you will just have to reopen your New Account screen. I am going to list out for you the following accounts that I want you to create, now that you have an idea of how to create the one. Keep in mind, if you mess up and record your new account, you can edit that account just by highlighting it with your mouse and hitting your CTRL E (edit) key. Or from the Top menu bar under Edit, click Edit Account (your cursor must be on the account you wish to edit). Let’s create the following accounts. From the New Account screen select: Type – Bank – Description – Savings Type – Bank – Description – Petty Cash Type – Other Current Asset – Description – Inventory (only if you’ll have it) Type – Other Current Asset – Description – Prepaid Expenses 31
Type – Fixed Asset – Description Fixed Assets (here is a tricky part; we are now going to make sub-accounts, the reason being to separate our assets by what type of asset they are. It makes for an easier tax return and asset report rather than throwing it all into one yellow file and saying here you go). I now want you to make four more Fixed Asset Accounts that need to look like this:
Your Fixed Asset Type, this would be your Main Account. It totals all of the fixed assets together into one lump sum.
Type – Fixed Asset – Description – Office Furniture, now click on the sub-account box and make a little check mark, go to the next box and select the only account that will show up, Fixed Asset. Click Next and make your next account.
This is Joe’s Office Furniture. We are making it a SubAccount of Fixed Assets so that we can separate our assets by what they are.
You will only be able to select a sub-account that is the same type, this being a fixed asset, so don’t worry, you won’t send it to payroll….
Type – Fixed Asset – Description – Office Equipment (this would be your computer, fax machine, expensive phones, etc.) Click sub-account and fixed asset. Type – Fixed Asset – Description – Vehicles – Click Sub-Account, Fixed Asset Type – Fixed Asset – Description – Accumulated Depreciation – Click Sub-Account, Fixed Asset. (Your accumulated depreciation is the total depreciation of the fixed assets the IRS allowed you to take and is accumulated until the full depreciation is taken. You will enter your accumulated depreciation in this account at the end of the year when your taxes are done – well, actually, after you finally file, because you had to file an extension.) If you are a contractor, repair shop, or have assets for production like Joe’s Internet business, you need to make a Fixed Asset account for your other assets as well. Those would look like this. Type – Fixed Asset – Description – Tools & Equipment – Sub-Accnt – Fixed Asset Type – Fixed Asset – Description – Shop Equipment – Sub-Accnt – Fixed Asset Type – Fixed Asset – Description – COG Equipment – Sub-Accnt – Fixed Asset Type – Fixed Asset – Description – Trucks & Heavy Equip – Sub-Accnt – Fixed Asset Now let’s move on; we’re getting close. Type – Accounts Payable – Description – Accounts Payable (no sub-account) Type – Credit Card – Description – Credit Card (we will make sub-accounts because Americans have too many credit cards) Type – Credit Card – Description – VISA – Sub-Accnt – Credit Card Type – Credit Card – Description – MasterCard – Sub-Accnt – Credit Card Type – Other Current Liability – Loans Payable Type – Other Current Liability – Sales Tax (Do you sell a product? If not, you don’t need this account). Type – Long Term Liability – Description – Vehicle Loan – no sub-account
Type – Long Term Liability – Description – (Did you borrow money from a relative or bank to open your business? If so, put that name under Description to track your loan due.)
Now we’re at the Equity accounts. QuickBooks® most likely already created four Equity accounts for you: the infamous Opening Balance Equity (the one I prefer you didn’t use); Owner’s Capital, with two sub-accounts called Draws and Investments; then the Retained Earnings account. I want you to change the name of your Owner’s Capital Sub-Account. Highlight the Investments Sub-Account, and from the Top menu bar either select Edit, Account or hit the CTRL E (Edit) key. It will open up this account and say Edit Account on your template.
Owners Capital. This account will total all of our contributions and deduct all of our draws if set up properly.
Change the name of the account from “Investments” to “Contributions.” It sounds so much better, don’t you think? Also change the description, to “Distributions.” Click OK to record the transaction.
This Account is for the draws (money) you take from the business.
We are creating the SubAccounts to properly track our Capital.
If you are a partnership, follow these instructions to set up your separate Shareholder accounts. Create a New Account using CTRL N, or top menu bar selection, in the New Account Template: Type – Equity – Description – Owner #1’s Name Sub-Account – Draws Do the same for owner number 2 under the draw account. Now under the Contribution account you’re going to do the same thing. We need to make two sub-accounts (depending on how many partners there are). We are doing this so you can better track how much money each partner puts in and takes out of the business. This will make a sub-account under the entire capital account, which would look like this: Owners Capital Draws Joe Fred Contributions Joe Fred
Now that we’re on to our income accounts, the hardest part is over. Look at your business’s product, service, or source, and ask yourself what it is that you want to classify separately. The only reason why you would even consider having different income accounts is to track what it is that makes your business the most money. As we discussed for Joe’s company, he will only 35
need three income accounts. The main source of Income for Joe is Website Design. The second would be Web-Hosting Service. The third would always be Miscellaneous Income. It is also important to set these accounts up as sub-accounts underneath the main income account. That way QuickBooks® will calculate your total gross sales (all three accounts added together), then list them out separately on your profit and loss. That way if Joe thinks that he’s wasting too much time advertising Web Hosting when it was only 2% of his entire business earnings, he can consider axing that part of his business, or find another alternative to make it work. QuickBooks® most likely didn’t give you a main income account, so I want you to create one. Click the CTRL N key to make a new account: Type – Income – Description – Gross Income – No Sub-Accnt (it’s the main account) Now, QuickBooks®, I’m sure, has created a few accounts for you already. The names probably won’t describe enough of what you want to see, and they’re of course not a sub-account of the Gross Income Account, so we need to fix that. Remember how to Edit an Account? Highlight
Click Edit Account, make sure the account that you wish to edit is highlighted.
the account you wish to edit, either hit the CTRL E key, or select from the top menu bar Edit, Account. Your account will have the correct type, Income; however, do you want to change the name? Type the name you wish to describe that particular source of income. If you wish to use the QuickBooks® selected name, just tab your cursor down to the sub-account field and click on 36
the little box, tab to the next field and select Gross Income as the sub’s main account. Click OK to record your transaction. This will bring you back to the chart of accounts, and you will notice that your account is now moved over underneath your Gross Income.
Change all of the QuickBooks® pre-selected names so that they are all sub-accounts under your Gross Income, change the names if necessary, and add more income types if you have a number of different sources of income that you wish to track. I’ll give you a couple of business type examples: Painting Contractor Gross Income Residential Interior Painting Residential Exterior Painting Commercial Interior Painting Commercial Exterior Painting Miscellaneous Income Mortgage Broker Gross Income Commission Appraisal Income Credit Report Income Referral Processing Consultant Gross Income Consulting Training Travel Miscellaneous Now you need to decide whether or not you should track cost of goods sold. If you will have direct costs relating to your business operations, then it would be beneficial for you to separate your Cost of Goods from your general expenses to give you a better overview of your Gross Profit. Your Gross Profit is the money that you have left over after your direct expenses (Cost of Goods) have been deducted. This way it gives you a better idea of whether or not you need to 37
increase your prices. If your Gross Profit is too low, chances are you’re not charging enough and you’re going to end up losing money. Cost of Goods accounts are very important for all business types except consultants. Consultants generally have all indirect expenses such as overhead. They bill completely for their time, which really has no cost relating to it. So, if you’re in any other industry, you need to set up your Cost of Goods account. I’m sure you’re wondering why you would set up a “goods” account if you don’t sell a product, which is a very legitimate question. Think of it as a “Cost of Service” account if you’re Joe Standard and his Internet service company. What does it cost your business to service your customer base? There isn’t any difference in the breakdown of the two basic cash flow questions. How much money did I make this month, and how much money did it directly cost me to make that money this month? Let’s set up your Cost of Goods “services” account in QuickBooks®. From your top menu bar select Edit, New Account (or hit your CTRL N keys).
Type of Account is Cost of Goods
All Costs need to be a sub-account of the main account.
The account type is Cost of Goods. Under Description, type “Cost of Goods” (or “Services” if you like). This was your main account. Click Next to create your sub-accounts. I will break down the above income accounts to show you the corresponding Cost accounts so you can see what it should look like.
Painting Contractor Cost of Goods Paint and Materials Disposable Tools Gross Employee Labor Sub-Contracted Labor Jobsite General Conditions Miscellaneous Expenses
Mortgage Broker Cost of Goods Sales Commission Appraisal Fees Credit Report Fees Referral Fees Processing Fees Joe’s Home Based Business Cost of Goods Sold Equipment Repairs & Maintenance Equipment Supplies Gross Labor COG’s Depreciation Miscellaneous After you’re finished with your COG’s (Cost of Goods) accounts, we can finish your QuickBooks® setup by reviewing, adding, or changing the pre-selected Expenses accounts that QuickBooks® has created for you. Your expense accounts are your company overhead. These accounts will track how much money you’re spending on specific business items, and then give you a final picture of your company’s overall “Net Profit.” Your Net Profit is the total of your gross income, minus your total Cost of Goods, minus your total Expenses. Scroll down through your expense accounts in your QuickBooks® file and familiarize yourself with what you see. The first place I want you to go is to your Automobile Expense. Notice that there is just one account for Auto expense, with no sub-accounts separating what exactly your auto expenses for the year were. Picture this . . . your yellow manila folder filed in the Chart of Accounts filing cabinet with a couple hundred gas receipts thrown in, your insurance payments, and receipts for 39
a few broken windshields and new tires. Did you know that when you’re filing your taxes (preferably when you hire someone to prepare them for you), you need to separate your auto expenses for the IRS on your tax return? Imagine your messy file now. Do you have time to go through each one of those receipts and add them up separately to see how much each category totals? It’s no different in your QuickBooks® files. When you don’t create a sub-account for those specific expenses that require a more detailed breakdown of what you are claiming, it’s very time-consuming to go back and figure out an entire year. The best thing to do is to set it up the correct way in the beginning.
You will make your Auto Expense account look like these.
So let’s create sub-accounts for your auto expenses. Remember how you make a new account: CTRL N.
You are now creating your expense accounts. That is the type you will select.
Enter your SubItem name here, and make sure you mark, SubAccount of Auto Expense.
From your Create New Account template, make the following accounts: Account Type – Expense, Description – Gasoline – Sub-Account – Auto Expense Account Type – Expense, Description – Insurance – Sub-Account – Auto Expense Account Type – Expense, Description – Repairs & Maintenance – Sub Acct – Auto Exp Account Type – Expense, Description – License & Fees – Sub Acct – Auto Expense Account Type – Expense, Description – Miscellaneous – Sub Acct – Auto Expense Make sure you use these accounts. Your CPA or Tax Preparer will appreciate it. QuickBooks® has already created sub-accounts for your Insurance accounts, Tax accounts, Professional and Repairs accounts. The last few accounts are Other Income and Other Expense accounts. You can leave those as is. As I mentioned earlier, your Other Income account is generally for interest and miscellaneous non-earned income, and Other Expenses is for nondeductible wishful thinking. Now that your Chart of Accounts is set up in QuickBooks®, you can give yourself a big pat on the back, and we’ll move on to the next step. The following Chart of Accounts is going to show you the additions and edits that we made to Joe’s QuickBooks® Chart of Accounts. Compare his to yours to see how you did.
Joe's Home Based Business Account Listing Account Checking - Wells Fargo
Balance Total 0.00
Description Checking Account
Savings - Wells Fargo
Other Current Asset
Other Current Asset
Inventory Prepaid Expenses
Other Current Asset
Other Current Asset
Fixed Assets:Office Equipment
Fixed Assets:Office Furniture
Fixed Assets:COG Equipment
Fixed Assets:Accumulated Depreciation
Credit Card:American Express
Sales Tax Payable
Other Current Liability
Other Current Liability
Other Current Liability
Opening Bal Equity
Open Bal Equity
Gross Income:Neon Mouse Pad
Neon Mouse Pad
Gross Income:Web Design
Gross Income:Miscellaneous Income
Cost of Goods Sold
Cost of Goods Sold
Cost of Goods
Cost of Goods Sold:Neon Mouse Pad
Cost of Goods Sold
Neon Mouse Pad
Cost of Goods Sold:Repairs & Maint
Cost of Goods Sold
Equipment Repairs & Maint
Cost of Goods Sold:Equipment Supplies
Cost of Goods Sold
Cost of Goods Sold:DSL Connection
Cost of Goods Sold
Cost of Goods Sold:Gross Labor
Cost of Goods Sold
Cost of Goods Sold:Miscellaneous
Cost of Goods Sold
Cost of Goods Sold:Book
Cost of Goods Sold
Cost of Goods Sold:Software
Cost of Goods Sold
Cost of Goods Sold:COG Depreciation Advertising
Cost of Goods Sold Expense
COG Depreciation Advertising
Automobile Expense:Insurance Automobile Expense:Repairs & Maintenance
Repairs & Maintenance
Automobile Expense:License & Fees
License & Fees
Bank Service Charges
Bank Service Charges
Dues and Subscriptions
Dues and Subscriptions
Interest Expense:Finance Charge
Interest Expense:Loan Interest
Loan Interest Expense
Licenses and Permits
Payroll Expenses:Payroll Taxes
Payroll Expenses:Office Salaries
Postage and Delivery
Postage and Delivery
Printing and Reproduction
Printing and Reproduction
Professional Fees:Legal Fees
Repairs and Maintenance
Travel & Ent
Travel and Entertainment
Travel & Ent:Entertainment
Travel & Ent:Meals
Travel & Ent:Travel
Utilities:Gas and Electric
Gas and Electric
View your Account Types to make sure they are in the correct category. If you’re unsure, go back to the Account Type explanations on pages 26-29 to see if they match your setup. Notice on Joe’s Chart of Accounts that the Sub-Account information is detailed after the main account name. Look at Travel and Entertainment above; the first expense account is Travel & Entertainment. This account (the main account) will add all of the sub-accounts together, yet the sub-accounts will have their own total for each expense activity. If your Chart of Account types match Joe’s, you are ready to enter in your startup costs.
This page was accidentally left blank, and because the index was already completed I’m taking the easy way out.
Chapter 3 Entering Startup Costs It is now time to enter in your business’s startup costs. The best place to start is the list of items I told you to gather in Chapter One. You need all of your receipts, checks that you wrote out of your personal and business account, credit card statements, loan statements, car information and the whole nine yards. You need to now think in terms of “Write Offs.” If you miss a legitimate expense by not having a receipt by keeping track of it in a place where you will remember, you will be the one who can’t claim it at the end of the year. Being Self-Employed, you’re in a completely different ball game now. Everything matters and counts because it will affect you financially. I’m going to give you a little Accounting 101 on double-entry bookkeeping so you have a better understanding of what you’re trying to accomplish by using computerized bookkeeping rather than manual bookkeeping. Manual bookkeeping generally consists of the “bookkeeper” who keeps records of whom they paid money out to and who paid them money. Most new small business owners have a checkbook, yellow pad of paper and a calculator. That is their bookkeeping system. This system will only write checks, tally up who owes you money on a yellow pad, and call it macaroni. At the end of the year, they give the checkbook register to their Accountant to put their income and expenses together in the form of a tax return. The Accountant or Tax Preparer only adds the numbers that they see on the checkbook register to come up with a conclusion. There isn’t anything fancy or extra special in completing this, but it leaves you wide open to lose significant tax saving – such as by claiming expenses, income that could have been a capital contribution, or even a loan. There might be missed interest paid on your credit line or credit card. Or how about all of those credit card charges that you had on your statement, yet you didn’t pay your credit card off every month and didn’t give the Tax Preparer your credit card statements. How many thousands of dollars could that be? 46
Double-entry bookkeeping is not as difficult as people make it out to be. If you haven’t ever taken accounting, and you’re not familiar with Debits and Credits, there is a simple rule that will help you understand what you are posting. Your checking account consists of deposits you received in and checks that you paid out. If you were keeping track of your personal finances to see how much money you spent, how would you calculate it? Every time you wrote a check, where did it go? Let’s say you wrote a check for $1,000 to your mortgage lender. Your checking account would be reduced by $1,000. When you reduce an asset account, you are creating a “credit” (negative) transaction. The flip side to this is covered with double-entry bookkeeping. If you are reducing your checking account by $1,000, yet you want to keep track of how much it is costing you per year for your mortgage, you are going to increase your mortgage expense account; you are then creating a double entry to your books, which includes the “debit” (addition). You add to your mortgage expense account each month that you pay it, and it is going to keep going up. Each time you write a check from your checking account, it is going to go down. Just think of Credit as reducing and Debit as increasing. If you make a deposit into your checking account, you are increasing it (Debit); you then reduce your accounts receivable by the amount paid, because you are no longer owed the money; your Credit would be applied to that account. QuickBooks Pro® automatically enters the amount of the transaction that you post as a debit or credit when writing checks, making deposits, and all the way to entering customer invoices and vendor bills. The only thing you really need to worry about is making sure you type in the correct amount and you record it to the correct tracking account. Unless you are planning on having an in-depth accounting conversation at the local bean counter’s convention, familiarizing yourself with reducing and increasing dollar figures is more comprehensible for the Standard Joe who really doesn’t have time to try and figure out what a debit and credit is. It’s okay, and it’s not the end of the world.
Where do you start to enter into your stack of papers that I told you to grab? The easiest way to enter into your stack of paper is to separate them as I mentioned in Chapter One, then put them in order by Chart of Account name. What is the first name on your Chart of Accounts? It should be your business checking account. If you have not yet opened a business checking or savings account, wait until we get to Contributions.
Double click on your checking to open this account.
To open your Chart of Accounts click on this Icon.
Your Checking Account template is going to look very similar to your little checkbook, making it a bit easier to post entries. The only difference here is that you are typing them instead of hand-writing them.
Your checkbook register template.
Take your business checkbook, the one that the bank probably gave to you. Open up the book to the first transaction page. Most likely it was a deposit. Where did the money come from? Did you deposit the money from your personal account? Did you take a cash advance on your home equity line, or a credit card? The most important rule of thumb is to track where your money came from. It would be an incredible bummer if you couldn’t prove that you gave $5,000 to your business as a contribution, yet didn’t have a copy of any transaction to prove it, and the IRS told you, too bad, it’s now income. I want you to double-click onto the business checking account. This will take you into a template that looks like a checkbook register. This is where you are going to start entering in the checks that you wrote. The easiest way to show you how to set up your data (because I’m not sitting at your desk) is to show you with Joe’s Home Based Business, how to enter in beginning deposits, checks, assets and credit card transactions. This is going to be Joe’s Financial Story. Joe’s Home Based Business had only been in operation for one month. He just opened his business checking account, but most of his expenses were paid from his personal account, credit cards, and his home equity credit line. Below is a “yellow pad” creation in Microsoft Excel® of what Joe’s start up costs have been so far. I did not put them in a specific order, because I know yours are not (no offense!).
Picture this template as your yellow pad of paper that you have been trying to keep track of your expenses with.
I am going to start with the transactions that relate to our first Account, the Business Checking Account. Our new set of books have our Chart of Accounts set up, but we have an absolutely blank set of vendor names, customer names and owner names on our QuickBooks® name list. There are two ways that you can add names to the name list. The first way is to add them directly to the Vendor, Customer, and Other list by clicking on the icons located under the menu. QuickBooks® will pull up a template that separates the list by Customer, Vendor, or Other Names.
Joe’s Vendor list has names in it because I’ve been busy. Yours will be blank.
Your Customer List and Vendor list Icon.
To add a New Vendor, from this template click CTRL N or click on this menu item.
We do this so you can keep Income and Expenses (Customers and Vendors) separate from each other in the reports. The process is the same to enter new Customers, Vendors and Other Names; however, you must make sure you set up the correct name type in order to separate Customers from Vendors. It will affect your reports. In Chapter 5, there is more detail on setting up additional features for Customers and Vendors; however, in your initial startup costs, we are going to show the basic layman’s way of setting up names. When you are in the Vendor List or Customer List template, like the one above, QuickBooks® has already separated the account type. That is the list you are looking at. After clicking on the New Account menu item, the next
screen that you will see looks like this. You can add additional information by clicking on the tab located next to the Address Info.
Add additional information here if necessary.
To add a customer name the same way that we just added a vendor name, click on the customer icon to pull up the Customer List. You can once again take a shortcut and use CTRL N, and because QuickBooks® will be in the Customer List already, the type will go straight to Customer.
Customer Name List
When you go to set up an “Other” name on your name list, QuickBooks® is not automatically set up with its own icon. From the QuickBooks® Top menu, select List, Other Names. Because
your template will once again be from a “list,” your Name Type is already selected. Your other names will consist of miscellaneous names that don’t affect your sales or expenses, such as you, (if you are not on the payroll as an employee), Cash and Partners. When you contribute money to your business, the deposit is coming from you; however, you’re not a customer. You don’t want to show the deposit on your books with your name on the customer list. That would be a misconception of where the money came from. To the IRS, it could have been income. Set up your other Names the same way with Name, Address, and Contact Information, if any.
Select Other Name List.
The second way to set up new names, whether Customer, Vendors, Other or Employees, is directly from the template or screen you are working on. For me, the fastest and most efficient way of adding new names is while I’m entering in my checks, deposits, and any credit card charges. If I go by my little yellow pad of expenses that I’m setting up my books with, along with the checks, credit card receipts and address information, I have just cut my data entry in half. This is because you’re going to have to sit there and go through each piece of paper, adding new addresses and names until you are done. You could be entering in the check or whatever transaction you are posting, and QuickBooks® could flag the name for you, telling you it isn’t on the name list, and just by simply typing it in under the Name Field of your template, you can add it straight from there. 52
My first entry to my checking account is a deposit that Joe made to the company to get it started. Because we are making a deposit to this account, and you are in the checkbook register screen for the business checking, you need to keep that screen open, but from your top menu, drag your mouse across the top of the menu until you reach Banking. From the Banking menu, bring your mouse down until you see Make Deposit. Click on the Make Deposit selection and QuickBooks® will bring you to the Make Deposit template. If your deposit was from a Customer or client payment, there will be a section for that at the end of this chapter.
Select Make Deposit.
Now I’m going to show you a shortcut in setting up your name lists so you’re not sitting at your desk all night wishing you were watching the game.
In my Make Deposit template I am going to add Joe’s deposit. Under the Received From column I start typing in Joe’s name. QuickBooks® will flag it and say “That contact is not on the Name list; would you wish to add him now?”
Your Deposit screen asks who you received the money from, this time it was Joe.
Click on SetUp.
It also asks if you wish to Quick Add or Set Up the name. The difference is, you will not have the address, telephone number or account number information if you select Quick Add. If you have the addresses handy, do the setup right away because you will get frustrated when you go to print out checks and stuff them into the envelope, just to have it returned because there was only a name and not an address in the delivery window. It will definitely make your life easier in the long run. After you click on Quick Add or Set Up it will prompt another window with the Name Type. This is what I have been mentioning before. This is very important: if you’re not tracking the type of transaction correctly when you set up the name, it will interfere with your reports and name list later.
For Joe, I click on the other circle.
If it’s a customer make sure you select Customer; a Vendor is someone to whom the business owes a liability such as Rent, Services, Cost of Goods, Loan payments and any debt the business pays out as an Expense. Employees are those to whom you pay an hourly rate or salary; you also deduct and pay their payroll taxes. A 1099 contractor is a Vendor, not an Employee, and any item on the other list would be Shareholders and Owners. If you are planning on putting yourself on the payroll, which includes having payroll taxes deducted and filed, set yourself up as an Employee; if you’re just a small Joe’s Home Based Business, Other is where you should set up your name. You cannot change the type once you created transactions on the account. If you’re still not sure if you should set yourself up as an Employee or Other, go ahead and set your name up as an Other Name for now. We can always add you as an Employee later if you start deducting payroll taxes. Once you have entered in your name and address, the Other Name template will prompt you for phone numbers and account numbers. When setting up Customers and Vendors, it is important to add that information, but you obviously aren’t going to have an internal account number for tracking purposes. Go ahead and click Okay to record the data. You will then be brought back to your Make a Deposit screen.
Whether or not you made an opening account deposit of $100 or $1,500, the entry process is the same. Joe made a $1,500 deposit to the business checking account from his personal checking account. Since we don’t set up our personal checking account on our business books, the way to track any money paid by you to your company is through an Equity account that we set up called Owner’s Capital. In this case, the owner is giving money to the company to operate, so it is not a draw, it is a capital contribution. When making our deposit into the business checking account, you will type in your name in “Received From.” The next column is the From Account. This is where you are creating double-entry bookkeeping to your Owner’s Capital Contribution 55
Account. To track your books even better, you type in the check number of your deposit check, the type of deposit being Cash, Check, Credit, Wire Transfer, and then of course the amount.
Your double entry account. This will keep track of how much money you put in to your business.
Click Save and Close to record the deposit and QuickBooks® will bring you back to the Checkbook Register page. You will then see an entry on that page that shows a balance in the account of $1,500.
Our checking account balance.
Joe’s Capital Contribution Deposit.
Once I begin posting all of my entries that are on my yellow log sheet, I put a check mark by them as I go so I don’t forget to include any deposits or expenses. Now I can go to the next “business checking” item on my list, because that is the account that we are working on first. 56
The next item up for bid is an equity loan payment. Because we purchased equipment from our Personal Equity Line for our business, it is considered a business debt and expense. The business will pay for its own debts. From the Checkbook Register template I want you to click on the icon that says Check with a little yellow check.
Check icon, or shortcut CTRL W
From this screen we are going to post all of the checks that the business wrote out. Generally we will do this using our hand checkbook, since we’ve been good about recording all of the checks and withdraws that we have made thus far in our business endeavor. Joe only has three checks to post out, and just as before in making the deposit, the vendor list is blank. There aren’t any names in it so we are going to go directly to the “Pay to the order of” field on the check screen above and start typing in the name of the vendor whom we wish to pay. In this case it would be Equity Bank. Click on the “Pay to the order of” screen and type in the name of the company to whom you wrote the check out. Follow the setup instruction as we explained before and make sure you’re setting up the correct Type; our type for Equity Bank is a Vendor. Once I have set up the vendor, QuickBooks® will bring me back to my Check template. You will need to unmark the “To Print” box in the middle right side of the check so that we can manually enter in the check number that was hand-written. Once that is unmarked, you can go back up to check 57
number, type in the actual check number and change the check date to the actual date that you wrote the check on. Type in the check amount and tab down to the memo line. When you’re printing your checks, it is important to put your account number on this line, especially if you’re paying an Equity Line, Credit Card or something that is in your personal name but is a business expense. This will make it easier for the company who is cashing your check to make sure they post it to the correct account if your payment coupon is lost. Your next line is your account. This is once again your double-entry bookkeeping. In Joe’s case, he is paying down his Equity Line, so I am going to pull up the Equity Line account, which on my Chart of Accounts is called Equity Line. The next line, “amount,” will carry down your total paid amount of the check. Under the “memo” field – this is important for clean reports – if you type in what it is that you’re paying, it really does help the cause of the future Tax Preparer or CPA who doesn’t have to ask you a million questions on what this check paid if it’s posted to the incorrect account. Joe’s check looks like this.
Chart of Account listing here.
The bank account the check is written out of.
Once I’m finished posting all of my business checks to my QuickBooks® checking account, I’m going to close the Write Check window by selecting Save and Close or clicking on the x in the 58
right corner of the check template, and QuickBooks® will bring me back to the Checkbook Register template. I can then see all of the entries that I have just made to this account. I now have a new balance of $1,085 after posting all of the checks that I have written. You need to compare this balance to the balance in your manual checkbook to make sure you haven’t missed any additional checks, deposits or withdraws that you might have made. One of the biggest mistakes people make with their money is not to write down checks or withdraws into their checkbook register. It adds up rather quickly, especially if you’re short on cash.
Moving on to the next expense on our yellow pad, our credit card accounts show up before our equity line, so we’ll post to that one next. Credit cards are a pain in the . . . you know what. They are the number-one inconvenience in bookkeeping, because there are so many receipts! They are really a receipt nightmare, but if you want to do it right, soak it up and let’s get started. If you have more than one credit card, we can assume that you already set them up on your Chart of Accounts during that portion of this guide. Joe was a good boy and so far only used one credit card, his Visa.
I want you to take your mouse to your top menu, drag it over to “Banking” and scroll down to Record Credit Card Charges.
Select Record Credit Card Charges. Older versions of QuickBooks® will say enter Credit Card Charges.
It will bring you to a template that looks like this.
You can select from more than one credit card by pulling down the arrow.
Just as with any other part of the QuickBooks® name list, we’re going to have to set up our names here as well. You can do it from this screen by typing in the name of the vendor in the Purchased From Section. The first credit card receipt that Joe has is for purchasing QuickBooks®. When you’re entering in the credit card charges, you need to make sure you’re posting them to the correct expense account. People get confused about the expense account, 60
thinking it’s the credit card account. We’re already in the Visa Account. That is what we’re adding our revolving debt to. We still need to expense the credit card charge and make sure the expense account is posted correctly. It’s once again just the double-entry bookkeeping.
Our Expense account.
Type what the purchase was for.
I am going to finish posting Joe’s Visa purchases to his account. Joe has three items that we will need to depreciate because they are fixed assets. He purchased a desk, filing cabinet and a fax machine. When you’re posting those entries, you cannot expense them because you have to track them as a fixed asset. You can only expense them at the end of the year when you post your depreciation. To expense an item means to write the entire cost off immediately.
Our Chart of Account, Fixed Asset Office Equipment
Description of the asset is very important for your Tax Preparer.
Once I am finished posting all of my credit card charges, I click on Save and Close, and QuickBooks® will bring me back to my Credit Card template. If yours is not open, from your Chart of Accounts, double-click on the credit card account that you posted all of your charges to. My Credit Card template shows all of the charges that I have posted. This account gives me an accurate picture of how much money Joe owes to his Visa card. It’s nice to budget without any surprises, unlike getting your statement in the mail and thinking to yourself, my balance is so high, I don’t remember buying that!
Click this X to close the template
Joe’s credit card liability.
Move on to our next Account that has activity to post, Joe’s Equity Line. Click on the X to close the Credit Card Register, which should bring you back to your Chart of Accounts. If you’re not there, pull up your Chart of Accounts again by clicking on the Acct icon, or from the Top menu, Select List, Chart of Accounts. Scroll down on your Chart of Accounts until you reach the Equity Line account or, whichever liability account you borrowed money against.
Your liability accounts.
Account Types list.
We had already posted a payment from our business checking account to the Equity Line, and looking at our screen, our double-entry bookkeeping worked. The payment to Equity Bank shows up on this screen. If you notice, we have a negative amount because the purchases have not yet been posted.
This entry is from the check that Joe wrote to the Equity Line, it paid down the balance.
There wasn’t a prior balance because we haven’t posted the purchases yet.
Joe purchased a computer server, and the software to operate the server. Those are our COG (Cost of Goods) Fixed Assets. Because this is not a specific credit card account, QuickBooks® will make any transaction posted to these types of liability accounts a Journal Entry. Your cursor should already be highlighting the date. To record your transaction, change the date if necessary
to the actual date of purchase, and enter the transaction number, if any, in the next column. Type in the Name of the Payee (set up the new name if necessary), and because we are increasing the amount we owe to the Equity Line, we are going to type in the amount on the Increase column. Next we will post our purchase to our correct Fixed Asset account; type in a description of our asset under the Memo line and click on the Record button. Our template will now look like this.
Type in the name of the company you purchased from here.
You would be increasing your balance so type in the purchase price here.
Your expense or asset account would be entered here, and type in a description under memo.
If you used your Equity Line to deposit money into your business checking account, you would make a deposit from the Make Deposit banking area of QuickBooks®, and the account on the Deposit screen would go to your Equity Line. The entry would look like this.
The banks name that holds the equity line.
From Account would be the Equity line Liability Account.
It is depositing into your checking account.
And this is where it shows up.
It shows going into your checking account.
And increases your liability to your equity line to $12,475.00
The next fun part is posting all of the expenses that we made using our personal checking account. From your Chart of Accounts screen, drag your mouse down until you are at your Owner’s Capital Contribution Account. Double-click on the account to open it up, and you will see a similar register to all of the other account registers we have used. Notice in Joe’s register he has a $1,500 amount in it.
That’s because he gave his business a check for $1,500 to open up his business checking account. It shows that we have posted it to the correct tracking account. We are going to enter the expenses the same way we did on the Equity account, straight from the Account Register template. In your case, you need to make sure you have your personal checkbook, cash receipts and canceled checks handy so you don’t forget anything. Here is what Joe’s Capital Contribution Account will look like after I post all of his expenses.
Now Joe knows he put in $2,410.00 out of his own pocket into the company.
Joe’s startup costs are now completely entered into QuickBooks®. 9 If you’re not a startup This is where you ask yourself how far back do you want to go to enter in your data. If it’s the middle of the year and your business started the year before, chances are you already filed your income taxes for that prior year. You would begin the accounting records on the first day of the new year. If you have only written maybe 30 to 40 checks per month in your business checking account, you should be prepared that it will take you around two hours for each month of data to enter those in. Once you’re more comfortable with the software and what you’re posting, it should only take you an hour. So if you want a true picture of your Company finances, then start in January. The three main items that you will need to enter in are from your business checking 66
account (or personal if you still use that one): all income or loans that you received and deposited into your personal or business account, all checks written for business expenses, and any unpaid customer invoices that are still due to you. If you don’t care about the prior months of the year, you’re the one who will need the information so you know how much money you made to file your income tax returns. If you start fresh on a new month and don’t care about the preceeding months, you will just have to manually add up your income and expenses and give that to your Tax Preparer so they have a complete annual picture of your business earnings. If you decided that on July 15th you’re going computerized, go back to June 1st, and start entering in the checks the way we discussed in the first part of this chapter. At least you will have a full month of income and expenses to record. The one downfall that you’re going to have is when you go to balance your checking account. If QuickBooks® only has a certain bit of information from June 1st through the last recorded entry in your checking account, there are always some checks or deposits that have not cleared the bank yet. (They haven’t been cashed or posted). You need to ask yourself if you have been balancing your checkbook every month, and if you have, pull your last reconciled bank statement out. If you’re lucky, it will have all of the checks and deposits that have not cleared the bank yet. You need to enter those in first. The reason is that you will balance your checkbook using QuickBooks® from now on, and if QuickBooks® does not have them in the system yet, but they’re on your newest bank statement, your balance will be off. It’s much easier and faster, and honestly is not rocket science. What better way to know how much money you have, down to the last penny? There will be a detailed description on reconciling bank accounts in Chapter Five, so from here, just start entering in your checks and deposits the same way we discussed in the first part of this chapter. If you haven’t been balancing your checkbook, go ahead and just starting entering in the checks you wrote from the last month, so we can reconcile the next month’s statement to find out how much money you actually have since you haven’t been keeping track. Your Chart of Accounts (filing cabinet) is going to help 67
you when posting these checks. If you’re not sure what expense account to use to post a certain check, scroll through your Chart of Accounts to see if you can match it up with a “file” that sounds like it’s what you want to put it in. First post all of your checks written. Make sure you have the correct check date that is in your checkbook register, the correct check number, and the correct amount. Once you’re done entering all of the checks written, the next step is to enter in all of the deposits made into your checking account. You are probably not going to want to go back an entire month or year and enter in each customer invoice to post the payment to. It is okay to enter the payment directly from your Make Deposit screen in QuickBooks® without invoicing when you are just setting up your accounting. Remember when we made a capital contribution deposit? Go to your Banking menu list at the top of QuickBooks®, select Make Deposit, and in this template, we can enter in all of the deposits that you took to the bank. Hopefully you kept good records and know who paid you, and you know what it was for. This goes back to the “proving” theory. If you have your deposit slips, use those along with your customer checks to make sure that they match. Make sure you’re not putting non-income items into income accounts. If you do, you will pay taxes on them because your Tax Preparer is not going to know who each and every one of your clients, vendors, brothers, sisters and cousins are. If you lent your business operating money,
You can enter dates that have already past, you want your QuickBooks® file to match your bank statement.
If you have more than one check with a deposit, enter them all together so your total deposit in QuickBooks® match your bank deposit slip.
you would post it to your Capital Contribution Account to track how much money you gave your business to date. If you have miscellaneous items in your checkbook such as ATM Withdrawals and Bank Service Charges, you need to post these as well or your QuickBooks bank account will not balance. In Chapter Five, we will discuss your Petty Cash account and how to keep track of those expenses. However as a rule of thumb, say you went to the bank and took $40 out, decided to go to Office Depot to get some office supplies, and paid cash. Your $40 ATM Charge would look like this.
Petty Cash Chart of Account
ATM Cash Withdraw
Who’s to say that your cash withdrawal is going to match 100% to the Office Depot sales receipt? To make it cleaner and easier, you will post it to your petty cash account. QuickBooks® will then increase (deposit) that $40 into your petty cash “bank” account. Now it looks as though you have a cash box in your bottom drawer with a few greenbacks in it. Place your Office Depot cash receipt in that box or “Petty Cash folder” to keep track of all of your cash receipts that are business-related. Now your ATM withdrawal is deducted from your checking account to give you an actual balance. Generally Bank Service Charges are posted at the time you reconcile your bank account, but you can manually enter those in as well. We’ll pretend that Joe’s business account was already hit up by a monthly fee of $8. I would enter it in this way: 69
It’s paid to the banks name, and it’s expensed to Bank Service Charges
Because it’s an auto withdraw from the bank I type in Auto so I know what it’s from.
The layman’s reason why I enter mine in when I know they’re due is so my checking account never runs short with missed charges. I don’t like surprises, and if you don’t let them catch you, you’ll always be one step ahead. Now that you have your business checks and deposits entered in from either the beginning of the year, or the last month you chose, we can move on to invoices if you bill your customers. If you’re just doing cash sales, we’ll get to that in Chapter Five. 9 Entering in Invoices still due The easiest way to do this is to gather all of your customer invoices due, whether it’s on a yellow pad, or you used preprinted invoice templates. We’re hoping that you have this information in one specific place, because I guarantee you will lose thousands of dollars if you can’t even tell who owes you money. From the QuickBooks® Top menu, either click on Customer, or click on the invoice icon at the top of the screen. This will bring you to the invoice template. You are going to have to enter in each invoice separately. It’s the only way to track your Accounts Receivable and keep on top of the invoices that are due. Let’s pretend Joe’s new company had two customers who had ordered services before he was even set up. To assure their service, he pre-billed them on a handwritten invoice. This is who Joe will bill in QuickBooks®.
Joe's Home Based Business Customer
My Online Mortgage
Web-Site Design - 5 pages 12 month Web Hosting at $21.95 per month 5% discount for 12 month
Date 7/1/2003 7/1/2003
Invoice # 1001 1001
Web-Site Design - 2 pages 6 month Web Hosting at $23.95 per month
$395.00 $263.40 -$13.17
With our QuickBooks® data file being “empty,” we do not have any customer names or billing item descriptions in our data file, so we need to set those up. Just as with anywhere else in QuickBooks®, you can automatically set up a Vendor, Customer, Account or Item Name from an open template – in this case our invoicing template. We will start by typing in the customer job. QuickBooks® will once again pop up a window that says “not on the customer list.” We don’t want to Quick Add this customer because we need all of his information to print on the invoice. We will set him up.
Once you click okay, you will be taken back to the invoice template and the contact information will be in the “Bill To” box. If it’s not, you didn’t record your entry and need to do it again. Next you will enter in the correct date of the invoice, which on Joe’s is July 1st. The invoice number that we put on the first invoice was 1001. You will then need to select your payment terms. Your payment terms are when you require your payment due and received in your office. Customers and clients generally have 30 days to pay their bills, just like you. It is common business practice when you accrue your accounts receivables and don’t work entirely off a “cash basis.” My terms are: due in ten days, with finance charges applied after 30 days. Some businesses will give a discount if paid within 10 days to get payment sooner, which is entirely up to you. Next is the “Item List.” The Item List is a detailed listing of our services, products, or inventory broken down separately so that you can track what it is you have and do on your financial reports. From the top menu, click on New Item.
List Menu, click on Item List
Your invoicing Item Selection
You will notice that there are a number of “Types” of items that you can choose from.
Your item types.
This is the same principle as when you’re adding a new Account to your “filing cabinet.” If you don’t have an Item List that breaks down your product, service or inventory, how would QuickBooks® track your double entry? When you create an invoice, it needs to go to two places just like your mortgage payment: (1) it is going to your Accounts Receivable Chart of Accounts folder; and (2) the Item List that you set up for that income item is tracked to an Income/Expense account. On Joe’s I am going to set up the following accounts; his first account will be WebHosting.
Make sure your prices are accurate. $21.95 x 12 Mos = $263.40
If your item is income, make sure its double entry is the correct income account. This is your double entry bookkeeping tracking account.
Because Joe will bill based upon monthly, quarterly, bi-annual and annual hosting rates, we are going to make our Sub-Accounts so that we can set up a different price for each billing time. 73
Joe’s website design is going to be billed out at an hourly rate. When we set up the amount column on the New Item template, it will be based upon an hourly charge and you can enter in the hours on the invoice. Once I have Joe’s Items set up, this is what my QuickBooks® Item List will look like.
All of Joe’s Items are a service. If you’re billing for specific pieces and parts, you will select “Non-inventory” parts (unless you are tracking inventory). As with the industry-specific examples in Chapter Two for setting up your Chart of Accounts for Mortgage brokers, you would set the Item List up with the same Name information you used to set up the Income accounts. If you sold e-books via the Internet and had to track each specific Item, this is where you would set it up. Example:
Non-Inventory Item Type.
Income Account is E-Book.
The reason I chose to make the Gross Income Accounts different Sub-Accounts is that in my ebook store, I want to know how much sales each e-book did on its own rather than having them all stuffed into one manila file folder. Once all of our Items are added to the list, we can begin invoicing. I do guarantee, as your time progresses you will be missing Items or Account names that you will want to add. I noticed, when creating Joe’s invoice for Mymortgage.com, I did not set up a “Discount” account, and Joe gave his customer a 5% discount. To set up a discount opportunity on your invoicing, from the Item List, when you add a New Item there is a selection for Discounts, and if you want to track how much of the total sales you allowed discounts for, you will also set up a discount (yellow folder) on your gross income Account. This is what it would look like.
Type is discount, no sub-account
Your double entry tracking – Gross Income:Discounts You will have to set up this new income account
The reason you’re tracking a discount, which is a reduction of sales to an income account, is that it is income-related. You’re giving a credit to your customer on a certain portion of goods or services and want to know what that end result is.
Now that I’ve created the Discount Account and have entered in Joe’s invoice, this is what the completed invoice will look like. I compare the total QuickBooks® invoice amount to my handwritten invoice amount to make sure that they are the same.
With the discount applied, they are the same amount.
To make sure all of my invoicing equals each other, I’m going to add the stack of handwritten invoices to the stack of computer-generated invoices and come up with a total due to me from my customers, $946.93. Now I want you to go back to your Chart of Accounts screen, and look for your account called Accounts Receivable. The total in that account should equal the total that you added together from your handwritten invoices.
My A/R due is $946.93 and equals my hand written invoices.
Now we’re at the fun part of double-checking what you just created from your stack of papers and receipts. How will you know it’s correct? You have to compare it just as we did with the invoices. The best place to start to compare your newly created books to your out-of-date tracking system is to run your first reports. From the QuickBooks® top menu, select Reports.
Select this one.
Highlight the memorized report screen. It will pop open to the side of it a list of memorized reports. Click on the list that says, “Memorized Report List.” Here you will find a screen that looks like this.
Your General Ledger report
Double-click on the report that says General Ledger. This is going to bring you to the first confusing-looking report that you will be introduced to. It’s really not that bad. Your General Ledger is created based upon all of your yellow folders within your Chart of Accounts filing cabinet. They include every detail from every Account that you created. It is just going to show you every check written, every deposit made, every credit card charge, and every account that they came out of and the double-entry bookkeeping account they went into. It is one great big giant double-entry pad of paper. This is also where we can see if our numbers are accurate with our checks, receipts and invoices that we just entered into QuickBooks®, and if they are posted to the correct Account. The first thing I want you to do after you double-click open your General Ledger Report, is to click on the Modify Report screen.
Change the date to include all we have just created. In my case it’s from 7/1/03 to 8/7/03 Click on Modify Report
Un-mark account, click on debit and credit.
Click on Advance, and select In-Use Click OK to save changes.
The first tab says “Display.” You want to change two things on your Display screen. I want you to look down to the columns portion. This is what you can choose to be included in your report columns. I personally don’t like to just have an amount and balance on my General Ledger, and in learning how to understand your reports, neither do you. Scroll down to the bottom of your Columns, and unmark the Amount checkmark, and right above it, mark the debit and credit. In
six months you’ll thank me. Now click on the Advance button. You want to select “In-Use.” I love trees and don’t like wasting paper. There is absolutely no need to include all the Account that have a zero balance or no activity. It will make your reports 60 pages long, and it’s not necessary. Click OK, and QuickBooks® will bring you back to your General Ledger Report. The following pages are a printout of Joe’s General Ledger Report. This is where we’re going to go through and double check that everything on our list is accounted for. The first place I go is to that yellow pad that Joe had all of his numbers written on. I know that they total $12,083.95. I scan through the accounts on my General Ledger to make sure I see all of those purchases, charges and deposits and mark them off as I go. Once you’re down to your income and expense accounts, this is really where the majority of your double-entry bookkeeping is going to show up. Look at the Account Name and then view all of the entries that were applied to those accounts. Make sure they sound accurate. If you paid Ma and Pa Bell for telephone charges, yet it is showing up in Office Expense, you know you’re wrong. If your entries are wrong, you can double-click on the entry that is incorrect, and it will open you up to your original entry. You can change the account that it is currently posted to. Re-record your changes by clicking okay, and QuickBooks® will take you back to your General Ledger. Your payment to Ma and Pa will now be moved, hopefully to the correct telephone account.
Now before you close out this new report that you have just modified, you want to memorize it; otherwise QuickBooks® will not pull up the one I had you change. From the General Ledger Report template, the left-hand side is an icon that says “Memorize.”
Memorize Icon. Click on it.
Your next screen is going to say, “The Report you are memorizing already exists. Do you want to replace it or make a new one?” Well, since you aren’t going to use the old one anymore, replace it by clicking “Replace.” The next time you need to run a General Ledger Report, your new report will come up.
The last thing I want you to do before we move on to the next chapter is to make a backup of your QuickBooks® data file. It would be a big inconvenience if your computer crashed after you had just done such a great job. From the QuickBooks® top menu, select File, Backup or click on the little icon that says Backup.
Location is the “A” floppy drive.
Click on Back-up to save your files.
If you have a 3x5 floppy disk available, stick it in your “A” drive. Click on the Backup button once your drive is properly selected. Once your company has a lengthy life, your QuickBooks® file will become too big for just one floppy. Keep your backups in a container where you will find them. You never know when you might need to restore the file. If you use QuickBooks® consistently, make it a habit to back up your files once a week. You can override old backups because the new one will contain the same data plus anything new that you have entered.
This chapter was written to get you familiar with QuickBooks® in the basic steps that you need to enter and create a new set of books. It does not touch on specifics because your thoughts are processing what you have just created. Once you get to Chapter Five, your familiarity with remembering part of this chapter will help you understand day-to-day bookkeeping, and hopefully you can say, “I get it.”
Chapter 4 Creating Your Company’s Budget & Cash Flow
This chapter covers the most important part of any bookkeeping or accounting. This is where you’re going to land flat on your face if you think it’s not an important part of business or understanding your businesses future. It’s really easy to say “I’m going to go into business for myself.” I have a great idea and it’s better than anyone else’s. When you said those words to yourself and possibly to your spouse to get their approval, did you figure out how long it could possibly take to make this business work? Did you plan ahead and figure out exactly how much money you needed to survive to do this full-time? What is it going to cost you? We know what it cost you so far; we just did that in Chapter 3. But what if you fall short of your expectations and can’t afford to pay your mortgage next month because your savings is depleted and your equity line is maxed? The first spreadsheet we are going to start with is for your personal budget. If you don’t know how much money you need personally to survive every month, how will you know how much money your business will need to make in order to pay you a draw or a salary? People always get a misconception of personal and business budgets, and yes you need to keep the checkbooks apart, but if there isn’t any personal, then there isn’t any business budget. The spreadsheets that I have created in Microsoft Excel® include your Personal Budget, Cash Flow Projections up to 3 years and your Business Budget. I use these spreadsheets to create Business Financial Plans and Budgets for clients. They are going to give you a bigger outlook on your business idea. I do not recommend using a QuickBooks® budget for this purpose because it lacks a lot of the important expenses that are not always booked in on your Profit and Loss Statement. The spreadsheets may look like a lot of information that you don’t feel capable of understanding, but if you don’t mess with my formulas because they are “working files,” then 84
everything will be calculated for you and all you will have to do is enter in a number. Take out the CD that contains the Computerized Bookkeeping Spreadsheets, and insert it into the CD Drive on your computer. If you do not have Microsoft Excel, you can open these documents using Microsoft Works. I mentioned this in the “Where to Begin” chapter. Double-click on your Microsoft Works or Excel icon on your desktop. From the Top menu, select “Open file.” This is where you would change your information to open my Excel file if you had Microsoft Works and not Excel.
This is a “works” file Change the File Type here to an Excel or works File. This is an “Excel” file.
Keep in mind that you cannot work from this file from the CD. It is saved as non-writable so you can always have the original in case you lose your file. Once you begin changing dollar values, you need to save “your file” to your hard drive. Open the first file, called “Personal Budget.” There are three spreadsheets on the CD, and all are saved separately to avoid any confusion. You will notice two budgets within this file. The tabs are located at the bottom of the screen. One says Joe Standard’s Budget and the other says “Personal Budget.” The Personal Budget is your working file. I have made extra rows and columns in case you have a great deal of bills that you pay out each month, and extra income columns in case you start making a lot of money.
Mess around in Joe’s to get use to your file.
Click on the tab that says Joe’s Personal Budget so that you can see the numbers and what the working file looks like as you’re reviewing the printed copy on the next page. The budget numbers of course are all assumptions, but they can give you a general idea of what you have in your household. This will allow you a stepping-stone for where to start with your own personal budget. If you grab your personal checkbook and flip through each month to see what checks you wrote out, you can use that as a tool and a more accurate guarantee about whom you will owe money to every month. The most important part of these spreadsheets is the formulas. They will add and subtract the expenses for you. Please make a mental note not to type in any of the bold or red columns because you will erase the formulas, and unless you’re really good and familiar with creating spreadsheets in Excel, you won’t know how to get it the box formulas back.
If you notice on the far left-hand column of Joe’s budget, there are descriptions of each expense that Joe has every month. You can type over the names of those expenses to make your report tailored for your house. Each column is broken down by month, with each month showing you how much money your household costs you to survive. Joe needs to make $2,925 every month to pay all of his bills. If he didn’t earn any money all year, he would need to have $35,100 in his savings account or available on his credit line to survive all year without earning anything. Joe now has a very good idea of how much money his business has to profit just to be able to pay him to survive every month. I want you to now click on the Personal Budget tab; take your checkbook out and start entering in the dollar amount of each bill you have per month. How much is your mortgage? Does your telephone average $40 per month? What is a safe number to enter so you’re not short? Always round it up. It’s better to estimate high and have a little extra 87
surprise at the end of the month than to estimate low and have to come up with the difference. Keep in mind that you are only entering in your personal expenses; nothing here is related to business, yet. You need to know how much you cost yourself every month. You will notice that once you make an entry in the month column, your totals are going to calculate and carry forward to the next month. You do need to manually enter in each month’s expenses. If they’re the same, just enter the same amount all the way across each month next to the description. When calculating your budget, there are things that are always missed like your DMV Registration. Are your property taxes in an Escrow account with your Mortgage? Do you have kids, daycare, or after-school activities that seem to cost an arm and a leg nowadays? There are extra rows at the end of the spreadsheet to add additional expenses that you might have. You need to include everything. When determining your income, be aware that most brand-new SelfEmployed individuals don’t have any just yet. Some still have a spouse who is working, or they’re receiving some type of benefit whether it’s legal or not. Some may be receiving alimony or child support. There are extra rows of income to include those amounts. Just type over the Income description with the description of yours so you know where it’s coming from. Let’s make an assumption and update Joe’s budget from the one above. His wife Joanne still works, and her paycheck is $2,250 every month after taxes. They also have two little monsters that have a nanny who watches them for $400 per month, and takes them to dance class every Tuesday for $65 per month. Joanne’s car broke down so they decided to get a new one, and the monthly payment is $225. It’s obviously used. . . . (Notice how it’s not Joe’s car or we’d be writing it off on his business budget and would have to set it up in QuickBooks®, but that’s Chapter 5. . . .) Now Joe’s budget has changed to look like this. His monthly expenses are now $3,615, but Mrs. Standard earns a net paycheck of $2,250 per month. If you notice on our spreadsheet, the monthly cost is $3,615; however, the End Cash Balance is only short $1,365 because we have Joanne’s earnings that pay for $2,250 of their monthly expenses. 88
If you look at the overall annual picture of their personal budget, they’re only short $16,380 per year instead of $35,100. The last column to the far right will total your entire year of expenses so that you can see what each item is costing you. You need to look deep within your means and needs and cut back on what is frivolous and not important until your business is at a point where it can afford to pay you what you’re worth. Unless you have deep pockets, you need to adjust your lifestyle so you’re not caught by surprise when you aren’t earning what you thought you would be. If you shave off the top now, you will survive longer financially. Think of it this way. Suppose you’re finished entering in your personal monthly expenses and you’re shocked at what you see; in your head you thought you only spent about $3500 per month. You notice your credit card balances keep going up instead of down. Even though you’re paying a little more than due, you realize that you go out to dinner four times a week. You also like to buy a lot of clothes, or think you “need” this or that when you’re at the store. Now your expenses are really
$5,000 per month, because you only would see the $200 per month “payment” to Visa, not the $1,500 per month you would charge. Ouch – you’ll never catch up. You need to cut back. Go out to dinner once a week instead of four times and ask yourself if you “need” something or “want” it. Do you need to be Self-Employed or do you want to be? You want to be SelfEmployed, but you spend money like you need a job. Now you need to find clients and customers, build a good solid business and earn a profit. Do you want to throw all that away because you don’t know how to control your spending habits? It is true, most new businesses fail within the first three years. They fail for a number of reasons: bad idea, bad product, or – the vast majority of them – bad bookkeeping and accounting. You can’t live from paycheck to paycheck without having self-control and financial discipline. Now, finish your personal budget, see what expenses you need or don’t need, and look really hard at the bottom-line number. If you have absolutely zero income all year, we’re going to assume that it will take your business a good year to start generating profitable sales. Can you survive with the number you see in front of you? Do you have the financial resources to pay your bills all year? You need to make the judgment call on where you have access to cash, whether it’s equity in your house, a credit line, or your savings account. Just because you have a great business idea, doesn’t mean everyone else thinks you do, too. A great idea doesn’t pay the bills until you sell it. I don’t want you to feel as if your balloon just popped, but you need reality if you want to make your business succeed. It doesn’t mean you can’t do it; it means now you know what it takes to do it. Now keep in mind, your personal budget is going to change one more time before you’re finished. The reason for that is your company. Your company budget is the next one we’re going to create. We don’t create them together because they are separate entities for tax tracking. If you are lending money to your business, you still want to know how much this “company,” which is now one of your monthly bills, is going to cost you. We don’t know that until we create the budget. The business budget uses close to the same format as the personal budget, but with 90
different descriptions. I want you to open your CD file called “Company Budget.” I have created an assumption of Joe’s company expenses based upon his home-based business. I know Joe isn’t going to have rent because he has a home-based business. His utilities, unless hooked up separately by the utility department for special home use, are still on his personal budget. Below is the first rough draft of Joe’s business budget. If you notice on the first column, I have the first month in there as of August. I modified the date because that is when Joe technically started his business, and it is where we are going to start budgeting Joe's business finances. If I look at my QuickBooks® business checking account for Joe, I know he has $1,037 in his account. I’m going to type that number in the checking column under August. That first column is the only place you can enter in a checking account balance; otherwise you will override the formulas that automatically add in your checking total to the next month. Notice that the rest of the months’ checking balances are in bold. Don’t type on those. My initial concern for Joe is to see how much money he spends per month on his business. If I look at Joe’s total expenses for each month, they average out to $524.95 in September
because Joe had to buy liability insurance for his Internet equipment. That $524.95 is Joe’s consistent monthly business expense. I want you to click on the tab in the Company Budget file you just opened that says “Your Company Budget.” The descriptive expenses can be changed to fit what your expenses are. They are also to remind you of what could become an expense in the future. Think about the type of business that you are, and if you have to buy materials, supplies or equipment. Look at your chart of accounts and add the description of expenses based upon that. You don’t need to be as descriptive because this is not a complete breakdown of your Profit and Loss. It’s your budget. I’ve inserted enough rows so you should have plenty of room. Make sure you type in the amount for each month so you have an annual budget. Once you have your consistent expenses typed in, look at the Total Expense row at the bottom of the report. Each month should be pretty close to the same right now unless you have any major changes in your business day-to-day expenses.
Now I want you to save your file by clicking on the top menu box, click File, Save-as..
Click file, save as
It will bring you to your next screen, Select Drive C
Click on the little yellow folder to the right. You’re going to make a new folder.
You will be inside a blank folder that looks like this. Click Save.
Name your folder your business name. Click Ok.
When saving a Works file, change the File Type here to Microsoft Works.
You need to also save your personal budget. This time instead of making a new folder, because it already exists, from the top menu select File, Save As, and Excel should take you directly to the business file you just created. You should see your company budget file in there when saving the personal budget. Just click on the Save. You are no longer working from the CD files; your files are located on your hard drive. When you open the files to update or use the budgets again, you will open it from your C Drive. If you’re using Microsoft Works, because it’s an Excel File, when you save the file, you will save it as a Works file. Microsoft will prompt you to do this. I can’t do the neat little print of the screen here because I don’t have Microsoft Works. Sorry. Back to budgets: when you saved your budget file, it shouldn’t have closed, but was just saved. I want you to go to your personal budget. If you look at the screen I printed on page 93, it shows a number of files across the bottom of it. One is a QuickBooks® file; the other two are my Excel files for Joe’s personal budget and company budget. They are just icon tabs for the files that I still have open on my desktop. Click on the icon that says Personal budget. If it’s not open, go back into Excel or Works and open the file from your C drive (where we saved it). Click on your personal budget. You will notice toward the bottom of your budget, you have a few extra blank rows. You need to type in your company name (abbreviate it if necessary); and in all twelve monthly columns you need to type in your company monthly budget costs. This will show you how much money your personal and business expenses added together run you each month. The next page is now Joe’s final estimated budget for the year. It includes all personal and business expenses that Joe has to pay out of his pocket every month. It will show Joe what he needs to earn to have his own business and to keep paying his personal bills.
His monthly expenses are now $4,140, and with his wife’s paycheck, he is short $1,890 every month. With the personal and business budget in place and an overall picture of what it takes for you to survive for a year without income, we can do the fun part now. If you know that you are going to have guaranteed sales or billable time, we can enter that dollar figure on your business budget in the monthly column where you know the earnings are going to come in. The reason I did not want you to do it yet, was to give you an overall picture of what your business looks like, worse case scenario. Never shoot the messenger, remember. . . . Let’s pretend that Joe just signed ten new customers who only want to do monthly payments for Internet access. So Joe knows that he’s going to get ten payments every month for Web-hosting services, and his monthly charge for Web hosting is $29.95. On Joe’s budget, I also know we had billed two of his customers for $946.93. I’m going to enter that in the budget as well, on the following month after it was billed, because we don’t know if the payment will be made early. Because Joe now has a little bit of income coming in every month, we’re going to take 50% of that and use it for advertising. We all know if no one knows you’re out there, you’ll never make any money. My updated budget for Joe is going to look like this. 95
I am not going to include any more income (accounts receivable billed) because we don’t know how much money Joe’s business is going to make. The beautiful thing about this budget report is, you can update it once you know you have landed a client or made more sales. When you update your billed income on your budget, and know that all of your general monthly expenses are accounted for and your end cash balance is positive, you can start including yourself in the budget for an Owner Draw, or a salary. You can always see what you have left over every month. We’re not going to change Joe’s personal budget again until he starts paying himself a draw. The reason, as I said before, is that we are more concerned with the actual hard costs. Anything else, such as the customer payments, advertising or a draw is not a guarantee until it is consistent. Having the big picture of both your budgets, the next big question that you need to ask yourself is, where are you going to go to support this expense until you start making money? You always need to assume that you’re not going to make a penny, because realistically until you deposit that check into your bank account, it’s not yours yet. Joe is the lucky guy. He has a 96
$65,000 equity line on his house. He already used $7,825 and now has $57,175 left. If he uses any of that to pay his monthly bills, his equity line payment is going to go up. Generally the payment is Interest plus .25%. If he tapped into his entire equity line, his monthly payment would roughly be $487.50 at 6% interest. In Joe’s current budget situation, by the end of the first year if he’s not making any additional sales, his equity line balance is going to go up by $22,680, giving him a total debt payable to the equity line of $30,505 ($22,680 + 7,285). He would be able to survive for two years if his wife didn’t lose her job. If his wife lost her job, he would have to make his business work within the first year, or their credit would be maxed and they wouldn’t have any income. They would be in a financial hardship. I can promise you this, though: if it only takes Joe a risk of $65,000 to get his own business off the ground and turning a profit by the end of the first year, he is going to make more of a return on his money than investing it in the stock market. It is an investment no matter how you look at it. It’s a big risk, but no different then giving Joe Schmoe down the street at Investments R-US a $25,000 check to invest his savings in a biotech company when he has no clue who they are. His odds are better on himself. The biotech company will probably do a reverse split and he’ll lose 50% of his investment because the value went backwards. At least Joe will be able to have more control in his company than in the stock market. At that point, you can only blame the person looking at you in the mirror if it doesn’t work. Who are you going to blame otherwise? Investments RUS? Now I want you to take your investment figure, the total of your one-year budget. Figure out where the money is going to come from to support that budget, and ask yourself how long you think it will take you to pay it back. There are a number of different scenarios that come into play when getting startup capital. It depends on how much money you need, what type of business you are, whether you need a lot of equipment or have a lot of startup costs. From my experience, if your business is looking for an excess of $75,000 in cash you will most likely be hiring a CPA or accountant to put your numbers together for you. Most of you who will 97
purchase this book will use your own means of cash to start your business . . . whether it’s a credit line, credit card, equity line, your savings account, or you borrow it from a family member (good luck to you on that one). You still need to consider paying it back. Once your business is in a position where you can pay more than the minimum amount due or just the interest, you need to start chunking payments to get rid of that liability. For Joe, his balance on the equity line at the end of the year is $30,505. If Joe starts making enough money in the second year of business to pay down that debt, his interest alone is $152.52 per month; he needs to at least duplicate it to make any significant difference in the balance. If Joe paid $304 per month ($152 x 2), it would take him sixteen years to pay it off. That’s not very attractive is it? If Joe had the financial means to pay at least $660 per month, he could pay that loan off in five years. At least that number gives him a basis or goal to try and achieve. The easiest way to figure out what your monthly payment would be on a loan and how long it would take you to pay it back, would be to go online to a mortgage calculator website. One of the easiest ones that I know of is www.erate.com. Or the longer road: take your total debt; say it’s a credit card that you owe $10,000 to. The interest rate is 18%. Take your calculator out and multiply $10,000 x 18% = $1,800; this is your annual interest that you will be paying on that credit card. Divide that by the number of months in a year: $1,800/12 = $150 per month of interest. Now I want you to divide $10,000/60 = $167 (your credit card balance divided by the number of months in which you want to be able to pay the balance off). The $167 is straight principal per month. To check your figures, multiply $167 x 60 = $10,020. This is what it would take to pay off that debt in five years. Sixty months is equal to five years (12 x 5 = 60). You already know your interest is $150 per month, and once your principal balance starts going down, so will your interest; however, in order to pay that $10,000 off in five years, you need to pay the principal of $167 + $150 interest accrued each month = $317 minimum each month on that credit card bill. By your second year in business, you should have an accurate idea of how long you’re going to take to pay down your 98
debt. On Joe’s budget, I did not pad (pay more) the credit card or equity line payment because it’s part of his startup costs. He isn’t earning any money yet, so there is no sense in trying to chunk payments to just borrow it again. The interest savings would be so minimal if you did that you wouldn’t even notice. Stick to your budget, and pay it back when your cash flow starts rolling in. Make sure you plan for your business debt. It gets very ugly when you blink an eye and your credit card debt goes from $10,000 to $50,000 in a matter of months. If your one credit card payment is $317 per month on a $10,000 balance, multiply that by five to see how much money you’re paying out each month. That’s $1,585 just for keeping up your payments on five credit cards. Can your budget afford that? If you’re smart about your money and plan ahead, you’ll prove to be more successful with your business.
Once you have both personal and business budgets in place you can start playing around with your company’s Cash Flow Projection. A Cash Flow Projection is more of a “goal” for your business. It is an estimate of what we think our company will do in sales, expenses and projected profit. Like every business, we all like to think big. It’s nice to dream, but can you walk the talk? What is it exactly that you do or sell? Why is it better than someone else’s? Because it’s yours, that’s why. So you can either sink or swim, and during that swimming lesson, you need to know from beginning to end what your business goal is going to be. Joe’s goal is to do more website design than Web hosting because at $79 per hour he has the capability of earning over $163,000 per year. The Web hosting is a service idea for his clients to have the access and ease of keeping the website and design in the same location. I want you to open your Cash Flow Projection file located on the CD supplied with this book. Once again, it looks a lot like your budget; however, this spreadsheet doesn’t bring your checking account balance forward every month. What this form includes are the sales and costs that we are hoping our new business will do. It will help you plan out your business’s life. You’ll be able to answer those questions like, 99
when can I hire an employee? Should I increase my prices, and how much money would I make if I designed 500 websites next year instead of the 100 I designed this year? QuickBooks® won’t tell you in detail your projected growth; it tells you in detail your actual sales, expenses, and profits. Below is Joe’s first year Cash Flow Projection. Because there are only five months left in the year, I’m going to start his projection in August, and just leave the first 7 months blank.
When estimating your sales, be realistic yet goal oriented. Don’t think so big just yet unless you’re sure of contracts and sales. Your expenses in the beginning are as close to the actual that you’re going to get. Increase your expenses as your sales increase. Joe wants to buy a new car in December. He thinks he’ll have enough sales.
In estimating Joe’s Web Design and Hosting income, I first started estimating low. Joe has had word of mouth advertising so far, and from friends and referrals, his beginning Web design service will hopefully average 20 hours a month for the first three months. I just took the 20 hours x $79 per hour (his rate) and came up with my figure of $1,580 per month in estimated 100
billable time for Web design. Joe has also estimated that he is going to have 10 Web-hosting clients per month at $29.95 per month. Joe thinks that by December, he will be billing out 30 hours per month of Web design time, and he will have 20 consistent Web-hosting customers. The expenses are comparable to his “company budget” expenses, but this is where you can make a goal to pencil yourself in to receive a paycheck. If you notice on Joe’s Cash Flow, he estimates that if he bills at least 20 hours per month in Web design, and has 10 consistent companies he hosts websites for, his income for the month averages $1,879.50. Yet his estimated expenses are only $744.95, so he has $1,134.55 left over each month. If this is the case, and Joe is able to live up to that income estimate, he will be able to pencil himself in to get an “owner draw” or a paycheck, budget additional money for advertising, and maybe throw a couple fifties towards his equity line of credit or his credit card. When I look at the bottom line number that says “Estimated Profit,” I can look at each month to see if it would be a mistake or a benefit to budget myself in or to pay down credit cards. Remember, these are “assumptions” about what you intend your business to do in the next few years. On Joe’s Cash Flow, he needs to buy a car sometime in the near future. Instead of putting it in his budget (because we know he can’t afford it right now), we put it in his Cash Flow Forecast. Joe can strive to make it to his goal and buy a car. Joe thinks he can buy it in December when his sales start going up, and now the company can also write it off as a business expense. I’m going to give Joe $750 per month draw starting in October, because according to our numbers, by the end of December he should have $4,985.25. If you want actual figures, it entirely depends on you and how well you sell your service or product, and your ability to continuously provide that service or product based upon your reputation. No one has a magic crystal ball. I can tell you that if Joe thinks that he’s going to do 20 hours per month in billable Web design time and he doesn’t have a guaranteed contract in his hand and is starting from scratch, he’ll be very lucky if he bills out 40% of that number. The first three months he will probably bill out 8 hours of Web designing, and gradually 101
progress. Put that 40% number in your head, and accept it. If you don’t bill 75% of your estimated sales and have a less attractive outcome, you would at least be expecting it rather than anticipating that great month. It says so on your paper, so why isn’t it real? Because it’s not that easy! That is why you’re budgeting, planning and estimating what you want your business to do. How else are you going to get there? Winging it doesn’t always work. Still estimate your sales to your goal, but know it’s just a goal. Below is Joe’s updated Cash Flow Projection.
Joe wants to pay more to his credit card, equity line and add more advertising, as long as he has cash left over.
Joe’s new estimated profit
I added a new box for Owner Draw because Joe will not pay payroll taxes, he will pay self-employment tax.
When creating your Cash Flow Projection, there are two main elements that you need to keep in mind. Number one, what is it that you sell? Is it your time or is it a product? Number two, what
does it cost you to make the product that you sell? We discussed the description of what a Cost of Goods is in Chapter three. They are your direct costs to make whatever you sell. If you came to me and said, “I have a home-based business, and I’m selling three different types of products,” I would break down the three products on your Cash Flow Projection to show what you were anticipating on selling for each product. Go ahead and type over the Income #1, Income #2, etc. column on your spreadsheet with the description of your service or product. If you have a number of products, put them into categories. Otherwise your spreadsheet will be ten miles long. If you’re serious about what you are trying to sell, I could only hope that you took the time to research what it would cost to make it; however, the majority tries to wing it. Costing a product or job out isn’t major brain surgery. The most inconvenience you will have is the amount of time it takes you to find out what everything costs. It’s really only research. For example, a service company is just billable time; your only expense is your overhead (most of the time), because generally you are billing for your brain. A General Contractor or Construction Company will have sub-contractors, materials, labor, tools and equipment. A Mortgage Broker will have appraisals, loan processor fees, commissions and underwriting fees. A manufacturer will have materials to make the products that it sells. Do they bake their product? Will they have cooking and cleaning supplies? A restaurant or bar will have dishes, food, drinks and laundry. The list is endless. You need to think deep inside that brain of yours and consider everything that it takes for your business to make what it is that it sells. If you don’t know how much all of this stuff costs, call around. Go online and search for what it is you are. Do you make a craft that has plastic? How much is the plastic? Do you need molds, how do you heat it? Joe doesn’t have any direct Cost of Goods except his Equipment. He bought that on his credit line, and his software was purchased on a credit card. But if Joe knows that all of his equipment added together equals $8,000, and the interest he’s paying on that equipment is at least 6%, that is another $480 for 12 months of interest. This is what Joe’s cost breakdown would be. 103
So it would appear that Joe needs to be able to bill out at least $23.23 per day to just pay for his service cost. If he charges $29.95 per month for Web-hosting services, he is only billing out $0.96 cents per day for one customer ($29.95/31 = .96). Just to break even, Joe needs 24 Webhosting customers per month ($.96 x 24 = $23.04). This is why Joe decided that he would make more money if he offered Web design. You never know how long it will take you to even get one customer when you are a small business with a low budget for advertising. Joe already has his hard costs entered in his projection, because that is what our monthly payment to the credit line and credit card are covering; however, your business could be entirely different. You could have a list of vendors who supply you with the product that you’re trying to manufacture and sell. I will make a couple different scenarios so you can see how to start costing out your product or service.
If I were going to manufacture and sell my own greeting cards, based upon my costs to print, I already know I need to charge at least $.62 cents to break even. I’m going to create a dummy Cash Flow Forecast for a greeting card manufacturer to show you what the spreadsheet would look like in a different industry. My greeting card company sells 3,000 greeting cards per month at $3.25 per card. I have one full-time employee who earns $8 per hour. I rent a little industrial
park for $450 per month and have standard business expenses. With my advertising costs of $450 per month, I am anticipating a 5% sales growth each month over the next 12 months. Based upon my cost to print and sales price, I have come up with the conclusion with my numbers that my greeting card company could have the potential of turning a good-sized profit if I stick to my goal and assumption. Below is the projection for a greeting card manufacturer.
$750.00 divided by 5,000 equals the $.15 cents each it costs to design the layout.
Payroll taxes are bold because there is a formula to calculate the Company's Federal Tax liability.
If you notice I added a bottom row called Quantity to my report. I wanted to see what 5% of 3000 cards would increase to each month, so I typed it in here. As the sales increased, midway through the year I gave my employee and myself a raise. Of course I’m worth more; it’s my company and my money that started the thing. Keep in mind this is just an assumption so I can see where I’d like my business to be in the next 12 months. At the end of the year if I came in per my projection, I would have $21,665 in profit. Even if I only sold 40% of our monthly estimate (as I mentioned before), I would still have a profit of $8,670.
If I had a mortgage company, the only way I could realistically figure out what the costs associated with my “service” would be is to base it on each loan that I sold. My cost breakdown would look like this. 106
Okay, I’m a little sarcastic, I didn’t vote for Gray Davis. Shouldn’t you know when someone’s name is Gray that the sky is definitely not blue?
A mortgage broker might also pay a commission to an employee, or a cost-per-loan fee; however, in my world, the mortgage broker did the loan herself. When creating the Cash Flow for a mortgage company, we all know it takes at least 30 days to close on a home loan if we’re lucky. Escrow always seems to mess up or miss documentation one way or another. It’s like their way of controlling your world. If my mortgage company just started out and I took my first three loan applications, the first two always fall through, so now I have just the one. My commission (points) are 2% for each loan I close, plus all of the reimbursable expenses that the buyer or seller is responsible for, such as appraisal fees, credit report fees and processing fees. However, I have specific processors and an appraiser that gives me excellent turnaround because I pay them promptly. So on some occasions, I will end up paying for those up-front fees before the loan closes. Then I also know that I could go sixty days before I even see my commission check. You need to budget your money and estimate your Cash Flow based upon your industry. This is my first-year assumption for a mortgage company. My average loan size is $225,000 ($410,000 if you’re in California; pretty disgusting, isn’t it! Not to mention that at least $150,000 of that number is all State and County fees!!!!!). My first month I have one loan in the “pipeline.” Word of mouth, my referrals are going to average me two to three loans per month; 107
but my odds of closing on all “three” will be about 40%. So my average is one loan per month. There is a dry spell in November and December in the market, so I know there are two months when I won’t close anything. Because my commission is at least thirty days out, and my October loan should fund in November, my two months of non-expected closing will roll into December and January. My goal is to average three loans per month by the end of the year, leaving aside the two months of holiday blues. Here is my projection.
My prepaid fees are accounted for in case I have to pay out of pocket. They increase based on how many
loans I have in.
Mortgage brokers yap on the phone a lot. Okay mother and sisters, this is not a dig at you-
I would love to put this formula in for you, but I’m afraid I would confuse you because each one is done for a different type of company. A yellow pad of paper and a calculator will do the same thing. Just enter that end result in the income columns above.
The Cash Projection is straight and simple. Generally the expenses will be the same every month until you start increasing your sales and productivity. The income projection is the most difficult part to figure out. You need to try and estimate how much you’re going to do or sell, and in the beginning, your guess is as good as mine unless I know what you are. There are three templates on your Cash Flow Projection CD. You will notice the tabs at the bottom of the screen.
Cash Flow templates 1, 2 & 3
When you’re finished with your first-year projection, if you plan on your company having big growth potential and want to see where you would be in two or three years, you can use the next two templates for long-term goals. Make sure you save the file to your hard drive periodically so you don’t lose your files. You will always have the template on your CD; however, any data that you type in will be lost if it’s not saved. There will always be some kind of expense that is going to pop up. A computer is going to break, your car might need new breaks, or your five-year-old needs new glasses because she grew a foot in a year. If you get a handle on your budgets and figure out what direction your company can go in, your probability of success has just increased 109
to the “will make it” side of business. Keep in mind as well, if your business is at a point where it is looking for startup cash from a bank, this Cash Flow Projection is what I charge a pretty penny for, to put together for banks. It gives a life expectancy to your business and answers the dreaded questions of how much do you think you’re going to sell, how much do you think it’s going to cost you, how much are your expenses, and what is your estimated profit when the year is done. Now congratulate yourself on completing your budget and cash flow; because that, my friend, is the most difficult part of the entire accounting process that you need to understand and do.
Chapter 5 Bookkeeping Maintenance The first step in bookkeeping maintenance is to set up a specific time to complete your bookkeeping requirements. The hardest part is over, and that is setting up your files and budget. Now you need to maintain them. There are five key elements that you need to focus on in bookkeeping. 1.)
Keeping track of your checking account a. Do you forget to post deposits? b. Do you forget to record the checks that you wrote out? c. Do you pass off reconciling (balancing) your checkbook and think the checkbook fairy is going to do it for you?
Billing your customer or clients a. Are you on a cash basis with customers? b. Do you want to bill them and give them 30 days to pay? c. How often are you billing your customers? d. Collecting money from customers or clients
Paying your bills a. Will you pay them immediately? b. Will you track Accounts Payable (wait 30 days to pay them)?
Keeping track of your payroll and sub-contracted employees (we will learn payroll in Chapter 6) a. Did you do the most convenient thing by hiring a payroll service? b. Do you have a lot of sub-contractors?
Keeping on top of the dreaded filing! 111
I have included an Adobe pdf file of a form called “Monthly Check-List” that I use for my clients so they don’t forget to give me certain information and statements at the end of the month. When you’re doing your own bookkeeping, you can use the same principle in this form. It’s easiest to three-hole punch it and put it in the front of your three-ring binder. You know the one that you promised to use after printing all of the reports I tell you to, sticking them in there so you have hard copies? That way, every month you pull out your trusty binder and go through the checklist. The monthly checklist looks like this.
Once you have completed each one of these tasks, mark it off in the appropriate month. If it doesn’t apply, mark n/a.
We will start this lesson with our key element number one. Keeping on top of your business and personal checking account is always such a fun job. There are often times that you forgot to record a check that you wrote out, record cash you took out of the ATM machine, or, now that everyone accepts ATM cards just like a credit card, you could have pages and pages of ATM charges. 9 Checking Accounts If you end up hand-writing checks out of your little business checkbook, you must still remember to post them into your QuickBooks® checkbook register. It is very important that you record all new transactions that you have hand-written to keep a consistent and accurate balance, especially if you are using two different checkbooks (one manual and one computerized) on the same account. If you still use a manual checkbook, the first thing you need to do is enter the checks that you have hand-written out, into QuickBooks®. To enter in manually written checks we use the exact same process we did when we entered in your startup costs. From the QuickBooks® top menu, select List, Chart of Accounts, or click on the Accnt icon. Double-click on the checking account to open up your template. I recommend you use the Check Template when posting the checks you have written. The reason is that the regular Checking Account template
You remember this one…
Click on the check icon to write checks.
screen doesn’t allow you to enter in customer/job information, and limits your memo and check information. It’s better just to get into a system of doing things a certain way so you don’t have to retrain yourself later, or go back and try to fix what you forgot to include. I am going to enter in all of Joe’s handwritten checks from August. He wrote them out of his checkbook and forgot to post them into QuickBooks®.
Still type in the memo line because it shows up on your reports.
If you’re entering in more than one check, click on Save & New.
Make sure you enter in the correct check number.
This box is not marked so you can enter in the check number.
After you have finished entering in all of the checks and ATM withdraws that you forgot to post into QuickBooks®, you need to run a Checkbook Register Report. Unfortunately, QuickBooks® doesn’t have one of these reports, and it’s very important that you have a hard copy of one because if your computer crashes, and all this cool new-age computerized bookkeeping cannot be recovered, the IRS doesn’t care. In Chapter 3 I had you run a General Ledger Report. We are going to make a mini-report out of the General Ledger Report. You memorized this report, so we need to pull it up. From your QuickBooks® top menu, select Reports, Memorized Reports, Memorized Report List. Remember if you select the Memorized Report List, QuickBooks® will keep all of them open on your open window list. Click on the General Ledger Report located in the Accountant area of the memorized reports.
Memorized Report List.
Your open window list.
Click on the General Ledger Report.
Once you’re in your General Ledger Report, the first account is your checking account, I want you to take your mouse and double-click on the balance number that is in the far right-hand side of the report.
Doubleclick on this number.
This will bring you into a transaction-by-account report that looks like this.
Click on Modify Report.
The only account included in this report is your checking account. Pretty neat trick. Now I want you to modify this report by clicking on the Modify icon on the left side of the report. You will be in a template that looks like this. (We’ve done this before). Stay in the Display area of this template.
The check-marked items are currently in your report. Scroll down and unmark the split and the amount field. Then mark the debit and credit field. Do not unmark or mark any
Click on the Header Footer tab
Once you have unmarked the Split Field and the Amount Field, and marked the Debit and Credit field, click on the Header/Footer Tab to change the name of the report.
Type in Checkbook Register
Click OK to save.
Click OK to save your changes, and QuickBooks® will bring you back to your new and improved report that looks like this. Now you have your own checkbook register. New Report Name.
Click Memorize Report, Save it with your banking reports.
Remember Credits are checks written and Debits are deposits.
It’s just like your little blue checkbook; only it’s nicely printed in legible handwriting.
To find this report, you memorized it under your banking so the next time you print it out, it will be under your memorized report list. Viewing Joe’s checkbook register, we can change the date to August to see what checks he wrote out in that month. This is Joe’s August Checkbook Register.
Change your date range here.
He wrote all checks and didn’t make any deposits for August.
His beginning balance was $1,085 and his ending balance is $510 00
Now, in September, Joe started processing his vendor bills by entering in his Accounts Payable. If you are going to pay your bills by using the Accounts Payable System, you don’t enter the bills directly here. We will cover that in a bit. If you want to go straight to paying your bills without “sitting on them” for the grace period, and have no need to know how much you owe your vendors all at once without adding it on a ten-key, then you will enter your bills directly to your checking account and pay them immediately. To do this, it’s the exact same function as entering in handwritten checks, except instead of writing in the check number on the check template, you click the little box that says “to be printed.” Open up your Check template by clicking back on the icon that says “Check.”
Select the Check date that you want the check to say.
Mark To Be Printed.
Click Save & Close or New if you have more to print.
I do not recommend that you print your checks from this template. It’s a real bummer when you go to reconcile your checking account and thought you had $2,000 when you only had $500 because a check you printed from this screen was not saved. If you don’t save it and hit the escape key, even after you printed the check, it will not be recorded into your QuickBooks® checking account. To print your checks, from the QuickBooks® top menu, select File, Print Forms, Print Checks.
Once you select Print Checks, you will see a list of all the checks that are ready to be printed. If you accidentally wrote them out of the wrong account, your screen will be blank.
Mark all the checks you want to print and click OK.
Enter your next check number. Mine obviously isn’t 1.
After you click OK, QuickBooks® will let you select what printer, paper, etc. you want to print from. (Make sure you order voucher checks!)
Voucher checks give you a perforated copy to attach to your bills. Makes for great filing.
Make sure your checks are ready and click Print.
Once our bank statement comes in for August, we can reconcile this bank account. Depending on your bank, the bank statements usually get to your office between the 5th of the month and the 12th of the month. We are going to learn how to do our Accounts Receivable before I teach you how to reconcile your bank accounts. There is some logic behind this madness. It is because you need to learn how to receive payments and make cash sales that go into your checking account, and if we put the cart before the horse, I’ll confuse the you know what out of you. After you are finished paying your bills, staple the bottom portion of the check to the bill that it is paying, and file it away in its own little filing cabinet. See Filing at the end of this chapter.
9 Accounts Receivable You should have determined whether or not you will bill your customers/clients over a term (let them pay it in 30 days) or if you are operating on a Cash Sale basis. Regardless, you need to still make a sales receipt of some sort. In QuickBooks® if you are accruing your sales by invoicing your customers, we should have done all the dirty work in Chapter 2 by setting up your QuickBooks® files along with the Item List. This is where you are really going to see if you forgot something or not. We briefly touched on invoicing in Chapter 3, entering in your Startup Costs; however, that was such a long time ago, so I will show you again. There is a special portion of this chapter devoted to Job Costing, which includes a different type of invoicing, so I won’t elaborate on that here. I can honestly tell you right now that there is never a good time to designate for invoicing. The reason is that if you sit on your orders or billable time, whatever service or product you provide, it will be just that much longer before you get paid. It’s not like your Accounts Payable bills; if you don’t bill, how are you going to get paid to pay those bills that you owe? Invoicing will be your biggest inconvenience besides filing. And I hate filing! If on Monday you get an order, finish a job, progressive bill, or charge a retainer, bill it on Monday, even if it’s just one little order. It’s still an order and it’s still money. Joe just got a 121
Web-design order from Biscuit Boy Dog Treats. Joe bid the job out at 5 hours, and needs to send Biscuit Boy an invoice. From the QuickBooks® menu bar, click on the Invoice icon.
Invoice icon. This is for accrued Invoicing, not a cash sale.
Biscuit Boy isn’t on the Customer List, and I need to set him up. Remember, you can do it from this screen.
His invoice would look like this.
Enter your Item list to track each item separately on your reports. Make sure you select “To be printed.”
Joe gave him 30 days to pay
Save your invoice!
If you are billing for a new item that isn’t on your list, you can add that item directly from the invoice template. Let’s say Joe wants to start selling that book that he wrote called The Ins and Outs of Web Design. Joe now has a taxable, tangible item for sale. Because he sells it over the Internet and does not have a storefront, his sales are only taxed for the books that he sold in his state, California. By the way, Way to Go Arnie!!!! Yes I voted for him, I am a small business owner too, and I don’t care what political side anyone is on, a Governor’s experience is On The Job Training; unless you held that position your entire life, no one has had experience until they sit in that chair. He’ll do great things for California. Setting Up Inventory Items From your Invoice template, we will set up a book item account for Joe. It is an Inventory Item because we will have a quantity on hand. The next template, you have seen before. This is where you set up your original Item List in Chapter 2. I am going to set up three different inventory items for Joe to give you an idea of what yours should look like if you sell an inventory product.
To add a new item, we can type it in here. You will be prompted to set it up.
Since it is not on the list, we will set it up here. This is just the shortcut to add a new item.
The items in this column are associated with the sale of your inventory item. If you have new items, you might need to add a different income account to track. Joe charges $39.95 per book.
The items in this column are associated with the amount it costs you to manufacture or purchase your inventory product. Your Cost of Goods accounts are tracked here. Joe’s is COG:Book. Joe’s vendor charges him $7.95 per book.
Your Quantity at hand.
There are two ways that you can enter in your beginning inventory. The first is by plugging in the actual number of inventory you have on your shelf in your “Quantity at hand” field. If you did this, it would just be one lump sum entry, and there wouldn’t be a Vendor to track that initial first inventory to. QuickBooks® will also take that Quantity because when you obtain inventory, you have to get it from somewhere by paying for it. It does this by making a journal entry into that account that I can’t stand – Opening Balance Equity. I do not recommend that you enter in your inventory quantity this way. Take the long road and do it right. This is what it looks like if you did it the easy way out.
This is where the adjusting entry went. Joe entered it in on the item list template.
Now your Opening Balance Equity has a balance of $329.50 in it.
My first question would be – how did you pay for it? Did you use your own money? Well, then why isn’t it in a Capital Contribution Account? Or do you still owe a vendor for this? Did you write the Vendor a check and just put it somewhere in an Expense Account? Do you see how one entry could make such a big mess? Here is how you need to do it. If you wrote a check for the inventory, go find the check. Hopefully you already posted it into QuickBooks®. Let’s say Joe wrote a check to Mr. Printer for the whopping amount of $29.50 on September 21, 2003. He already entered it into QuickBooks®. I’m going to go to my Checkbook Register and find the check that I entered in.
I’m in luck, here it is. Notice Joe didn’t know where to apply it so he put it towards Misc. Cost of Goods. Double-click on this check.
Once you find the check that you wish to change, double-click on it, and QuickBooks® will open it up to the template that looks like a check.
You can modify this check to make corrections. Make sure you clear out this entry to $0.00 to correct it because you must use the “Item” tab to track inventory.
Click on Items to modify for inventory. Enter in your items purchased after you cleared out the expense item. Click Save to record.
Now that I have corrected my check and inventory item, the inventory will now track this purchase to the correct account and not stick it in a sloppy file. You will have to go into the QuickBooks® generated Journal Entry and delete it, otherwise, your inventory will show 100 mouse pads rather than 50. From your Chart of Accounts, double-click on the Inventory Account Name. It will pull open a template that looks like your Checkbook Register. In it you will see the entries that you made. Double-click on the GENJRL entry created by QuickBooks® and from your top menu select, Edit, Delete.
If you ordered your inventory from a Vendor and they billed you for it, when you enter your bills (we will get to billing in this chapter), take the same procedure as writing the check, and in the Bill template, instead of using the Expense Tab, you will use the Item Tab to enter in your Vendor Bill. This is what Joe’s Vendor Bill looked like after he posted the purchase.
The item is the book; enter the Quantity you ordered.
If the vendor charged shipping or taxes, you enter those in the expense tab, and QuickBooks® will add the two together. That should total your entire bill.
Joe’s Inventory Account now shows all the items that we just added, and where they came from.
It even shows where we corrected the check Joe wrote.
Now that we have a few inventory items set up, I imagine you’re wondering why I waited this long to explain it without including it in the initial QuickBooks® setup. The reason is that I wanted you to see what the inventory relates to. If you’re just entering in accounts because I tell you to, and don’t know why or where it’s going, then you’re not going to learn or pick up on this fun job so quickly. With Inventory, it relates to your purchases and your sales, and what better place to have you mess around in than the Invoicing and Billing? Now that we’re learning how to invoice, you can see how the proper way to set up your inventory is crucial to your
computerized books. So Joe is now ready to finish that bill he was starting for Biscuit Boy, because he wanted to order the book and the mouse pad. Biscuit Boy is in California, so we’re going to have to charge him sales tax because the items are taxable. This is what his invoice looks like. This is where QuickBooks® will track your sales tax. If you sell items for resale, you would mark Non-Tax here.
Select the items and quantity the customer is ordering.
This is where you separate Sales Tax by County.
To see what happened to your inventory, click on your Inventory Account on your Chart of Accounts. Your transactions will show up there. QuickBooks® is going to reduce your inventory account by the Cost of Goods price of the items sold, and increase your Cost of Goods Expense Account – your double-entry bookkeeping at its best.
The reduction of inventory from our invoice to Biscuit Boy.
This is the double entry from your inventory sale.
Yes, there is a reason why you can only write off a little bit at a time, and not the entire vendor’s invoice when it comes in. It’s because you have not sold all of it at one time; it would be preexpensing assets which would of course benefit you in tax liability, and that’s against the law. It’s called Tax Evasion. You write it off as you sell it. Now that Joe has finished his Invoicing for the day, he needs to print them and mail them out. Just like with printing checks, you can print the invoice from the Invoice template. Remember if you forget to click on Save and hit your escape key, your invoice will not be recorded and you will have to enter it in again. Just do yourself a favor, click Save and Close or Save and New if you have more invoicing to do, and print your invoices from the File menu in QuickBooks®.
This will show you all of the invoices that need to be printed and mailed out. Click OK, and make sure if you’re using your letterhead to test your printer first so it prints correctly.
Notice it selects your Accounts Receivable invoices due.
You can select the paper type here; select the correct printer and click OK print.
After I enter in all of the invoices that I just billed to my clients, I always run an Open Invoice Report in QuickBooks® to see who still owes me money. From the QuickBooks® top menu, select Reports, Customer/Receivable, Open Invoices.
Select this report. It will list out the most detail to see what invoices are due.
The following page shows all of the items Joe has billed that are still due.
These invoices are discussed in Job Costing. You didn’t miss anything.
Joe has a couple invoices reaching 69 days old. He needs to get paid on this immediately.
He has over $10,000 on the books.
If you’re consistent with your reports, and run a weekly Open Invoice, you can keep better track of what customers are becoming past due. It will give you more power to decide on whether to continue working or providing products for a customer who doesn’t pay their bills.
9 Creating Cash Sales Creating a Cash Sale does not mean that you received green cold hard cash for services or products; it means that you were paid immediately for the sale, whether it was a credit card, check, money order, cash, or even bartering. If you sell products via the Internet, or don’t allow a customer or client a grace period to pay their bills, then you would enter a cash sale. To do this in QuickBooks®, we will create a cash sale slip for an online order at Joe’s website. Someone browsed his site, but didn’t want hosting or Web design; all they wanted was his book. From the QuickBooks® top menu, select Customers, Enter Sales Receipts.
Enter Sales Receipts. If you have an older version of QuickBooks® it might say, Enter Cash Sales.
The sale is nontaxable because she is out of the state.
We will group with Undeposited funds.
Select the payment method that the customer used to pay you. This customer paid by using her Visa.
A cash sale, as I described before, means that you received the money for the sale right away, so when entering it in your computer, your Sales Receipt wants to know how you received the money, and where you deposited it. You can deposit the cash sale directly into your checking account if this one cash sale is the only deposit that you made for the day; otherwise you must group it with all of your un-deposited funds. If you don’t, your deposit to the bank will not match the deposit into QuickBooks®. If you accept credit cards, or even Paypal, receiving payments is tricky because they always deduct their merchant account fees. I can promise you that even though Visa® and MasterCard® say that they are only charging you 2% for the sale transaction, your 2% never equals their 2%. I have yet to see when it isn’t off that penny. How
much do all the pennies add up to, especially when you’re dealing with millions of charges per day? Joe’s sale was a Visa payment, and because he might have more than one Visa sale today, we won’t deposit it directly to his bank account. It’s going to sit in limbo in an account called Un-deposited Funds.
Here is our cash sale waiting for me to deposit it.
QuickBooks® can accept credit card payments and have them interlinked with your QuickBooks® file; however, you still need to apply for a Merchant Account to set it up. If you plan on using Paypal to accept credit cards, the best suggestion that I could make to you, is to set up another “Bank” Account and name it Paypal. I will set one up for Joe, and Joe can start receiving his payments using this credit card service company. The reason why I like Paypal for merchant services is the convenience of logging into their system and viewing all of your customer purchases and seeing your account balance down to the last penny. You always see what their merchant fees are without having to wait for the statement. I’m sure that in this day and age, the other merchant service companies have Internet account access capabilities, but I haven’t used theirs in quite some time.
It is still considered a Bank Account. They are holding on to your cash until you request it from them.
Now if Joe received another Cash Sale from an Internet order, and they used Paypal to pay for the products, this is how the Sale would look.
This time, I select Deposit to Paypal. The sale sits in my Paypal account until I request my money, in which case Paypal automatically deposits it into my business account.
Payment method is Paypal. You will have to add it to the list. Just type in the name and hit enter.
If you received actual green cash and put it in your pocket, you can deposit it into Petty Cash.
This is what my Paypal Account looks like. There is a cash balance of $103.85
After entering in all of your cash sales for the day, if you are receiving checks to deposit into your bank account for these sales, make sure you have them all entered in your bank deposit book and added together before you try and make your deposit entry into QuickBooks®. It will be frustrating when you’re balancing your checkbook and the deposits on your bank statement don’t match the deposits you made in QuickBooks®. To see the amount of Cash Sales that you made for the day, you can run a sales report in QuickBooks® to see where you’re at. From the QuickBooks® top menu, select Reports, Sales, Customer Summary.
This is all Joe has billed out in October. He can see here if he forgot to bill a customer.
If you’re in the type of business, such as mortgage brokers or bars and restaurants, that doesn’t necessarily create an invoice or a Cash Sales Slip, and you’re not using the QuickBooks® Point of Sale version, then you will most likely enter your “Sale” in when you are making a deposit. The next section will explain how you will receive a Customer/Client payment and make it into a deposit into your checking account.
9 Receiving Payments and Making Deposits Joe was pretty laxy daisy about getting his customers to pay . . . or is it just me taking a while to write this book? Okay, we’ll give Joe a break; it’s me. If you have a lot of invoices for the type of business that you are, when you receive your payments in the mail, you need to make sure you are posting them to the correct Invoice that the customer is paying. A lot of times you will get a check that has absolutely no invoice number, or note as to what it is for, and the amounts don’t equal anything on your books that this customer owes you. Those are a lot of fun. The best thing to do when posting a customer’s payment is to print out your Open Invoice report. That way you can go through the list, mark off what was paid, and see for yourself what invoice number you will be posting the payment to. The biggest mistake you will make is not making a photocopy of the checks that you receive from your customers. How the heck are you going to prove what it is they paid, or who they are, if you don’t have a copy of what you just sent away that you would never see again? Wouldn’t it be nice to have their account number in your files for the court to levy, in case for any reason you need to file a small claims suit against them for non-payment of your Invoice? You need to be smart with your money, and making copies of it is the smartest thing you could do for yourself. Joe finally got paid for his two oldest invoices, yet Getrichquick.com only paid him $300. Apparently they felt that the extra $1.70 wasn’t worth putting in the check. You can handle that in two ways: one by ticking them off and offending them over a buck seventy, or two, letting it slide and writing it off as a bad debt because you 136
know you’ll get more work from them. Joe chose number two. From the QuickBooks® top menu, select Customers, Receive Payments. Getrichquick.com paid on 10/02/03 with check number 1025 for $300, and My Online Mortgage paid on 10/01/03 with check number 193985 for the total due of $645.23. Joe deposited them both together on 10/7/03 into his business checking account. The total deposit on his little deposit slip to the bank was $945.23. We’ll post Getrich first.
Receive Customer Payments here.
Enter the Customer name on the received from line. QuickBooks® will pull up all invoices due for that customer. Enter the date that you received the payment, and in a normal world you would enter in the amount of the check that the customer made, but because this world is not normal, and we’ll do the hardest one first, anytime you are writing off a bad debt, in order to clear it out of QuickBooks® without having that $1.70 show up for the next 10 years on your reports, you need to clear out the entire invoice.
You do this by entering in the entire amount due, including the $1.70 that you are giving them because they don’t feel they should pay it. After you enter your check number, how they paid, and any comments, write a comment about the underpayment, and mark the group with other undeposited funds, because you have received more than one check that you will be depositing for the day. Click on Save to record your entry (Save and New if you have more than one to enter in). Next I’m going to post the My Online Mortgage payment received in the mail.
They paid the entire amount due, we post our entry and save and close.
Our Un-deposited funds account has a balance of over $900, and we need to deposit
Select Make Deposits.
the checks that match our deposit slip to our checking account. From the QuickBooks® top menu, select Banking, Make Deposits. If you’re one of those who really doesn’t like bookkeeping and accounting, you’re probably at the point right now where you’re wondering why you have to do so much posting and entering. It’s because of those nifty little financial reports that you get after all this is done. It’s worth it, and there’s no giving up; otherwise you’re letting the next guy win because he knows more than you do. The checks that you received from your customers will be hanging out in limbo until you put them into your bank account; this is what Joe’s looks like.
An older version of QuickBooks® will have a different template. It won’t include the payment type, only the “Select Payments to Deposit.”
The cash sale slip is showing up in our waiting-to-be-deposited screen along with the two checks that we just posted for our bank deposit. Since the online order was a Visa payment, we will not include that with this deposit, because Visa deposits the funds to your account, and it would make your deposit total not equal the bank deposit total. Now remember, Joe’s actual deposit for the day from his deposit slip was $945.23, yet when we select the two checks that we deposited, it totals $946.93. This is where we are going to write off the $1.70 that our invoice was shorted.
Enter the date that you took the deposit to the bank; make sure you select the correct account it is being deposited to.
Notice on Joe’s deposit, there are just the two checks that he is depositing; now we can make our Bad Debt Adjustment. Most likely you will need to add an expense account called Bad Debt. They are Un-collectible billed goods or services. You can add that account just like any other on an open template when you type in the From Account field. This is how you enter a bad debt to clear out an invoice without making a mess.
Print out this screen so you can staple the copies of the customer checks to this deposit detail.
Enter in the culprit’s name here.
The Account it is applied to is entered here. Bad Debt. Set it up if necessary. It’s an Expense.
Our new deposit total matches the deposit taken to the bank.
Enter in the Amount as a negative number so it reduces your deposit total.
Click on Save to record your entry. Now here is the not-so-fun part of dealing with credit cards. They have got to be the biggest paper trail I have ever seen. You think entering in those credit card charges on startup costs were a pain . . . try keeping track of credit card customer payments. If you get a nifty little printout from your merchant machine at your office, you made a cash sale, and entered it in the way I just told you how to; but now, how do you receive the payment into your QuickBooks®? If you used QuickBooks’® credit card system, then you could have the data automatically downloaded into your data files for you, but 90% of you will use your own system, and in tracking it, there are a lot of posting mistakes that are made. Each credit card company will have their own system for how often they fund (deposit) your merchant sales into your bank account after the credit card sale is approved. They usually do it the day after, excluding Discover and American Express, and I believe they do it monthly. So if you accepted Discover Card® payments, you would have to sit on all of your cash sale entries until the end of the month when they deposited those into your bank. If that’s the case, treat Discover and American Express the same way we treated Paypal. Set up its own “bank” account in your QuickBooks® file so that you could clear out your cash sales without having them sit on your un-deposited funds account. Here is an example from Joe’s business.
I select only the Discover Card Payments.
I am depositing all of the credit card purchases directly into the Discover Account so it’s not sitting in my un-deposited funds.
We don’t know what Discover is going to deposit into our bank yet, but we know they owe us $292.30.
Print this screen and make a file folder for Discover Bank Account.
Now at the end of the month, Discover Card sends us our monthly Merchant Statement, and it shows three credit card transactions, yet they only deposit $283.51 into our account. The difference is the merchant account fees. They total $8.79. Joe can go ahead and make a deposit from his Discover account to his Checking account for the $283.51 to show the deposit made by Discover Card. To do this, from the top menu, select Banking, Transfer Funds.
We are transferring it from the Discover to the Checking Account.
Enter the Amount of the Transfer here. Click Save and Close.
Because we only transferred the amount that was deposited into our bank account, we still need to expense the merchant account fees. If you look on your chart of accounts, it will show a balance still in the Discover Account for $8.79. We know there is zero in it, so from your Chart
of Accounts double-click on the Discover account so you’re in the Checkbook template. Just as if you’re writing a check to Discover Card for fees, you can enter in the merchant account fees directly from your template.
Just like creating a check payment.
After posting the fees, the account is now zero, and the funds transfer deposited the sales into Joe’s checking account. The difference between Discover and Paypal is that with Paypal, you can request a balance transfer in any amount that you would like without exceeding the total on your account. They automatically deduct the merchant fee at the time of the sale, so you see everything. Joe’s Paypal balance is $103.85. I know Paypal charges 3% to use their merchant account for sales. So we will say that Paypal deducted the $3.11 from Joe’s account, and Joe wanted to request $100 to cover expenses. He would make a transfer from his Paypal account to his checking the same way we did the Discover transfer, and then enter the merchant fee in the Paypal Account manually. If you accept Visa and MasterCard, they deposit the credit card sales consistently into your checking account; however, the totals are always different because the merchant fees rarely match.
Our Paypal account has .74 cents in it because we didn’t take it all.
This is where you’re going to have the least amount of fun. The only suggestion that I can make is to make sure you run a batch report from your credit card machine, and select those sales to deposit to your checking for that day. Try and calculate their merchant fee and deduct it from your checking account Make Deposit screen. At the beginning of the month when the bank statement comes in and it doesn’t balance, even I have to go into the deposits and edit the merchant fees to equal what the bank statement says so that it balances. If you’re lucky, they will balance, and the only way they can is if you can have access to view your merchant account activity from the company itself. Joe’s Visa Deposit screen would look like this.
Enter the merchant fees as a negative number so it reduces your deposit.
Hopefully the batch report that Joe printed at the end of the day will equal the total deposit that Visa made to his account after they deducted their fees. Sometimes you will find that credit card companies, even though the batch is closed for the day, will add another purchase on, and your bank deposit is going to be way off. If you plan on having an enormous amount of credit card charges from customers, my suggestion is to sign up with QuickBooks® so you have up-to-the minute transactions giving you an accurate bank deposit total.
9 Sales Tax Each state is different in preparing sales tax reports. Contact your State Tax Office, and order their Sales Tax Booklet. They do have employees who are there to help you fill out the forms and understand them. Because there are so many different State Offices in this country, my suggestion is go online, find the website of the state that you live in, print out their contact information, and nine out of ten times, you will be able to download an Adobe pdf file that has the current Sales Tax Forms and Booklets. You can print them out and put them in a three-ring binder. Depending on what state you live in and what county, your sales tax is based upon a percent of your gross sales. If you sell a taxable product, make sure that you fill out your application stating you are on a CASH basis. This means that your sales tax liability is calculated based upon the payments you received from your customers, not on the amount that you billed to your customers and they haven’t paid you for yet. You don’t want to give the State any money that you have no guarantee of getting yourself. Just because you billed your customer for it, doesn’t mean you’re going to get it. When the customer pays you the sales tax that was calculated on their invoice, you officially have received the funds; it is now a State asset and you must give it to them. If you sell to more than one city or town within your state, there is a great possibility that they have a different sales tax rate. You must make sure that you set up QuickBooks® sales tax to account for each different County you intend on selling to. If you sell 145
out of state, it is obviously non-taxable. The customer has to purchase it within the state you live in. There are a few exceptions on the East Coast, so make sure you check with your State Office. One of the biggest mistakes you could possibly make is to not make copies of important documents, such as Sales Tax Reports, Payroll Taxes, customer payments and deposits. Never send out an original signed tax return without making absolutely sure you have a copy of it in your file. I have a section in this chapter on what types of yellow files you should make, Sales Tax being one of them. Since Joe started selling books and software on his website, he needs to track his Sales Tax. The first thing you will need to do is to change your company preferences in QuickBooks® to have Taxable Sales, if you didn’t already do it in Chapter 2. To find Preferences from the QuickBooks® top menu, select Edit, Preferences. Scroll down to find the Sales Tax icon, and change the button to say Yes we charge sales tax.
Click on Edit, scroll down to Preferences.
Scroll down until you see the Sales Tax icon, and click on it.
Make sure you have clicked on Yes you charge sales tax. Click on Cash Basis. Click on OK to record your changes.
Next you will need to add or change your Item List with the Sales Tax information. I’m going to add three Sales Tax accounts for Joe. One is for San Diego, one for Los Angeles, and one for Orange County, California. From your top menu, click on Edit, List.
Remember, your Item List has your list and description of the product you sell, or services you provide. Joe is going to add the three new items to his list. Set up the next Sales Tax items until you are tracking all that you need. You can set up more Sales Tax items as time progresses. You don’t have a crystal ball to tell you where your customers are going to be from until you start making sales, so don’t worry if you only add your immediate Sales Tax items. If you have
just one rate in your state, only enter in one sales tax item, and under tax name, just type in Sales Tax. Now my new Item List is going to look like this. Notice the three new tax items on my list.
Select Sales Tax Item, type the tax Name (county of tax)
The different Tax Rate Counties within California.
Enter in the correct Sales Tax rate, Description, and the State Agency you pay the tax to.
Your tax rate calculated here.
Now the fun part is making sure you’re invoicing the items correctly. Study the laws and regulations governing your particular State. If you deal with resale, make sure you always get a resale number from your customers on file. You will need that number if you are ever audited, to prove that your business is reselling a product to another business for the purpose of resale. Sales Tax payments are generally due quarterly unless you have high retail sales. If that is the case, check with your State Tax Agency to find out what payment schedule you will fall under.
In QuickBooks® Joe already had two orders that were taxable. When a Sales Tax item is included on an invoice, QuickBooks® creates a double entry to your books by increasing the amount due on your customer’s invoice by the sales tax amount, and sending it to your Sales Tax account listed on your Chart of Accounts. Every time you charge sales tax, your liability account is going to continue to go up until you pay it. If at the end of the quarter when your Sales Tax return is due, and you don’t pay the Sales Tax the correct way in QuickBooks®, your reports will be incorrect. The State will mail you your monthly or quarterly Sales Tax forms. When you receive them you will need to calculate what your Sales Tax liability for that quarter is. In QuickBooks® there are two reports that are already memorized for you to use. From the QuickBooks® top menu, select Reports, Vendors & Payables, Sales Tax Liability.
Select this report.
This report will break down your Total Sales from your Taxable Sales and will enable you to fill out your Sales Tax return. You need to make sure your report is calculated based upon cash sales and not accrual. Never give away what you don’t have yet. This is what your report should look like. Joe’s sales are separated by Counties because California’s counties have different Sales Tax rates.
Click on Modify Report to make sure you’re calculating the Cash Sales.
Cash method for report.
In order to double check your numbers you need to print a Sales report along with the Sales Tax Liability report. This way you can make sure that you’re not leaving anything out. Joe’s cash sales for the third quarter, July through September, were $1,905.25. If I run a Sales report, we’re going to have to change it because, remember, Joe is on an accrual basis and has billed other customers who haven’t paid him yet, and we don’t want to include the accrual invoices on the Sales report. From the QuickBooks® top menu, select, Reports, Sales, Customer Summary.
This report is obviously an accrual because our Sales Tax Report shows sales of $1,905.25. Click on Modify Report to change it.
Joe’s total cash sales are $1,905.25; it matches the Sales Tax Report.
From Joe’s Sales Tax Liability report, his total sales tax liability is $134.94, and we need to pay this so it’s not late. Do not pay your Sales Tax directly from your QuickBooks® Write Check or Checking template. If you intend to track your Sales Tax, make sure you pay it correctly as well. To pay your Sales Tax, from the QuickBooks® top menu, select Vendors, Sales Tax, Pay Sales Liabilities. This way, QuickBooks® can post the payments to the correct accounts via doubleentry bookkeeping.
Pay Sales Tax Here…
Our next screen will show us the Sales Tax due broken down by County because that is how we set it up on our Item List. We are going to pay all tax, and select the “To be printed” box so that we can print the check. If you ended up hand-writing a check, you could also directly enter the check number without printing so that your Sales Tax is still paid through the proper steps.
You can change the date to see all tax liability; we only want through the 3rd quarter.
Total paid matches our tax liability report. Select To be printed to print the check.
If you don’t, your QuickBooks® file is going to continuously show a beginning balance due for your Sales Tax, and unless you can post the adjusting entry correctly, it will cause more bookkeeping harm than good. To make sure you have paid your Sales Tax correctly, doubleclick on your Sales Tax Account from your Chart of Accounts.
Joe shows two payments because of the different counties. They add up to $134.94
This is the last transaction at the end of the Quarter we were paying. It matches the Tax Payment that we made.
View the entries in the account and make sure you see your payment. It should say TAXPMT under the Type column. Now scroll up until you see the end of the Quarter Date that you paid it too, and see what the balance is in that column – does it match the amount that you paid? If it does, you have processed the payment correctly. If it does not, it could mean that you did not process prior payments correctly and just paid it straight from the checking account, or posted previous payments to an expense account rather than paying off your debt. Sales Tax tracking is usually one that my clients make the most mistakes on, and it can be frustrating and confusing to fix. If you were in a position where yours is completely out of balance and can’t figure it out, it would be worth your while to have your CPA or a bookkeeping referral come in for a few hours and fix it at $25 bucks an hour. Would you rather pay someone $50 to fix an error, or the State thousands of dollars because you underpaid Sales Tax? When you’re filling out your Sales Tax form from your State, just make sure that the total amount due on your State tax return equals the total amount due on your QuickBooks® Sales Tax report. You will be off a penny or two at times, which is normal. Make absolutely sure that after you fill out any tax forms, you make a photocopy of the signed return before you mail it. Staple the photocopy with your Sales Report and the bottom check stub and file it in a manila file called Sales Tax.
9 Accounts Payable Processing Accounts Payable is actually rather easy. Most vendor bills are on a Net-30 day cycle except for credit cards, phone bills, and electric bills. This means that if their invoice date is September 10th, then they will give you until October 10th to pay it. You have to be on top of any credit, phone and utility bills because depending on the company, they are sometimes due within ten days of the invoice date. The best way to make sure bills are not paid late is to write the check a week in advance. Accounts Payable departments usually run on a semi-monthly payment cycle. Which means, they cut checks 2 times per month, usually on the 10th and the 25th 153
of the month: the 10th for bills due on or around the 15th, and the 25th for bills due on or around the 1st. I recommend using the 10th and 25th. I know it’s a lot easier said than done if there isn’t enough money in your checking account to pay those bills, but you can have a mind-set of when you should process them, as a good habit. You need to choose how you want to pay your bills. Accounts Payable is a process of entering in bills that you have to pay, and being able to print out a report called Accounts Payable Aging, showing all the bills that you owe, when they’re due, and giving you an idea of when you can pay them. It also is a way to sit on your money as long as you can by using the grace period allowed by the vendor to pay the bill. If you’re going to pay your bills immediately when they come in and don’t want to track them, you only need to go straight to your checkbook register account in QuickBooks®, which we discussed in Key Element 1. The reason I like it when clients enter in their bills due and use the Accounts Payable process is because it’s easier to locate “lost” bills. I can see how much money they owe, and get a better picture of their liabilities. You may think you’re just going to pay the bills as they come in, but they always end up in a tray on your desk lost under 50 other pieces of paper, and all of a sudden you receive a shut-off notice from your phone company. How much of an inconvenience could it possibly be if you took thirty minutes once a week to enter in all of your bills? At least you would know who you owe money to and you would feel more comfortable that you didn’t lose any bills underneath the piles of paper flooding your workspace. There is a very easy system that you can work with. After you have opened all of your mail, put the bills in one pile. They don’t have to be in any specific order; QuickBooks® will automatically alphabetize it for you. From the QuickBooks® top menu, click on Vendors, Enter Bills, or click the icon that says Bills.
Vendors menu, select Enter Bills
Wouldn’t you know it, the Enter Bills icon is directly underneath the menu list…
Let’s say that Joe had a stack of bills that he needs to enter into QuickBooks®. When entering in your bills, your template is going to look like this.
Entering terms will calculate the due date for you.
This is your Expense Tracking Account. Track your bill to a specific customer job.
Type your invoice number or account number here.
Typing in a memo of what your bill is for will make your CPA or Tax Preparer your best friend.
I’m going to post the following bills due to Joe’s Accounts Payable.
When you’re entering in your vendor bills due, remember you will most likely have to add the majority of your vendors because you still have an empty set of books. Don’t quick-add them; make sure you set them up so you have their address information.
Your credit card is paying down a revolving balance; the payment is posted to the credit card: VISA ACCOUNT (Your credit card charges are posted differently)
The due date is entered in five days sooner than the bill so it’s not late
Type in the vendor name, date of the invoice (not the date you received it) and the date it’s due. Next, type in the amount due from your bill. If it’s a credit card and you wish to pay more than the amount due, type in the amount that you wish to pay on the card. You must at least make the minimum payment due. The terms are used to automatically enter in the due date. If you select Net 10 days, and the invoice date was September 10, 2003, it will show a due date of September 20th, 2003. You can change the terms at any time if you choose. They are not set in stone. QuickBooks® will just prompt you by saying, the terms have changed, do you want them to appear next time? The reference number is either the invoice number on their bill, or the account number they issued to you on their bill. It’s their way of tracking who is paying them and what for. It’s also important to put account numbers if it’s one of your personal credit cards that the business is using. How is Visa Corporation going to know that Joe Standard’s credit card is
being paid by Joe’s Home Based Business if the payment comes in on a business check? The only way they can tell is by an account number, or by your including the payment coupon. In the first memo field, always type in the Account Number that is on your bill. The next field is the Expense Account Line. This is your double-entry bookkeeping field. There are two places that QuickBooks® is putting this bill that you’re creating. One is on your balance sheet under your Accounts Payable Liability Account. That is your reducing (crediting) entry. The second place QuickBooks® is putting this bill is the account you are expensing it to, which is your increasing (debiting) account. Of course it sounds so confusing: why would a bill reduce a liability account? Shouldn’t it increase it? Think of it this way. Your positive cash is your increase. Your liability is your decrease. It takes away from what you’re worth. So every time you get a bill, it’s taking away and reducing your worth. Once you actually pay for the bill out of your checking account because right now it’s just sitting there due, it will increase your liability account and reduce your checking account. As I mentioned before, QuickBooks® is calculating and posting your debits and credits and doing all the dirty accounting work for you. Your biggest challenge is trying to understand why there are so many accounts in the Chart of Accounts and what they’re for. The memo field mainly shows up for internal accounting on your reports. Here you can type in what the payment was for. Was it for materials, supplies or subcontractors? You can enter in the more detailed description here. If you had a bill that should go to two separate expense accounts, you can split them on the bill template. Let’s say Joe received a bill from Mr. Fix It. His computer had a bad day, and he needed a little overhaul. Mr. Fix It also included computer cleaning supplies so that Joe could do some maintenance himself.
His bill would look like this.
Two separate expense accounts, yet one invoice.
The descriptions are explained so you know what you paid for, along with your CPA!
Just like you, other small businesses need their cash flow. Be considerate when paying the little guys’ bills. You’re a little guy now too.
After you are finished posting your bills due into QuickBooks®, the best possible place to file your Accounts Payable Bills due until you pay them is in an alphabetized accordion file. This is a cool little invention that you can purchase at any office supply store. They fit perfectly into your file cabinet drawer. If you take each bill due, such as for Bell Telephone or Visa, and file it in their corresponding letter, you know when you go to pay these bills that the bill from Bell Telephone is going to be in the B portion of the accordion file. No more clutter or messy papers on your desk falling out of folders, and you will know where everything is. It’s worth that $7 to buy one. After you have finished filing all of your bills, it’s time to run your first Accounts Payable Aging Report. You need to print one out each time after you input bills to be paid. The reason is that there will be occasions when you’re just too busy to go into QuickBooks® to see what’s due. If you have a report looking you in the face every time you sit down at your desk, at least you can be aware of the bills that need to be paid. From the QuickBooks® top menu, click on Reports, select Memorized Reports. Then select Memorized Report List. This will open it up and you will see the list of all reports that are memorized. Get used to this screen because you will use it a lot.
Double-click on the Accounts Payable Aging Summary. This report is going to show you the total due from each vendor.
Your Open Windows list showing all templates open.
Your Accounts Payable reports will be listed under Vendors.
It will not break it down by invoice or bill number. Just to show you the differences between reports and what makes one better than the other, I’m going to have you print out two. It will give you a good idea of what’s convenient and easy, and what limits the information that you are seeing. The summary report limits the information. It’s just a summary of what you owe.
Make sure your report date is calculating all bills due.
Joe owes $819.95 to all of his vendors as of today.
These are the Terms Due.
The Accounts Payable Aging shows a total of all the invoices due, but they are only separated by their Terms Due, such as Net 10, Net 15, Net 30 or Current. I prefer to use the Unpaid Bills Detail. It’s easier to budget with and shows you the invoice date, due date, and each invoice per vendor.
Change your date to include ALL.
This report shows your open balance due.
I suggest for your printouts, to run the Unpaid Bills Detail. I highly recommend you change the date to include ALL rather than the current date. The reason is that there will be more times than you can count when you enter the date incorrectly on an invoice or a check, or a vendor bill. The part of the date that is almost always wrong is the year. It will never show up on your reports if your year is off. If you include ALL then your reports will search every open bill due, and when you’re getting frustrated because you can’t find a bill that you know you entered into QuickBooks®, you’ll be able to see it in your Unpaid Bills report. You can double-click onto any bill in this report to correct the date, amount or incorrectly entered information. Now that your bills are entered into the Accounts Payable system, the next step is to schedule your bills for payment. In QuickBooks® if you do not pay the bills due from the Vendors menu, and pay them straight from your checkbook register, you will create an accounting nightmare. This is what 160
will happen if you pay any bills due that are already entered into your Accounts Payable by going directly to writing a check from your checking account. You will have a list of bills due sitting on your books showing “still due.” Then you have the possibility of making a double payment on those bills. Make sure you go by the system that you have selected. Accounts Payable bills must be paid by selecting from the top menu, Vendors, Pay Bills.
Vendors, Pay Bills.
After selecting Vendors, Pay bills, your bill payment template will look like this.
Select “Show all bills due” in case there are mistakes.
Your available checking account balance.
Select amount of bill to pay here, or click on the check mark to pay the entire bill due.
Select To be printed, unless you hand-wrote a check. If you handwrote it, you can pay the vendor bill, and issue a check number and check date by selecting Assign check number.
Since Joe has only $498 in his checking account, I have to see what bills I can pay without going overdrawn. If I select everything, Joe will go overdrawn by ($321.59), so right now I’m only going to pay the bills due that I can budget, until I either deposit money into my account, or get some of my customers to pay their bills. Because today is only September 13, I am going to pay the bills that are due by this date.
Joe’s broke; he only has $8.36, and his insurance bill is due in three days.
The bills are ready to be printed; I select Pay and Close.
Now you’re ready to print your Accounts Payable checks. From the QuickBooks® top menu, select File, Print Forms, Print Checks.
Select the next check number. Mark all the checks that you want to print, and click OK.
Make sure you select the correct bank account.
Make sure your checks are correctly loaded into your printer before printing. Some printers load differently; most load face down, which would make your check printing off. Tell your printer to box them face down: that way, when you grab a stack of checks out of the box, the next number will be face down on the top. If it’s face up, you will have to take one check at a time and place them on top of each other until the numbers print face down in the correct numeric order. It is a pain when you go to reconcile your checking account and the check numbers don’t match the QuickBooks® check number. If that ever happens, you need to correct the check number in QuickBooks® to the correct number that cleared the bank. When ordering your QuickBooks® computer checks, the most convenient checks are the voucher checks. They are a three-part check that allows the recipient to have a check stub to attach to their accounting records, and you have a check stub to staple to the corresponding invoice. If you get the standard checks that print three on a page, you will still have to hand-write your check number on the invoice it paid; otherwise you’ll never know from looking at the invoice if it was paid or not.
Click on Print. Make sure your checks are in the printer.
Select Voucher Checks.
Once your checks are printed, double-click into your business checking account to see the bills that you just paid. When you double-click into the business checking account, if you don’t
When paying from a bill, the checking account will show it as a bill payment check. If you enter the check directly into the checkbook register, it will just say check.
Joe’s checking account balance is $8.36
see your checks that you had just paid, it is possible that you didn’t select the correct account to pay them out of. To find out where they are, see Chapter 9. After you have finished printing all of your checks, tear off the bottom portion of the voucher check, and staple it to the invoice(s) that it paid. File it in your real Accounts Payable filing cabinet.
If you had to hand-write a check from a vendor who has the exact same bill due in your Accounts Payable Aging, you need to follow the same steps to pay that bill. Let’s say Joe’s Insurance Broker needed to pick up the check because the insurance company was having a cow. From the top menu select Vendors, Pay bills.
Select Assign check number instead of To be printed.
Click Pay and close.
Enter Check Number here and click OK.
Joe’s Accounts Payable Report now looks like this.
Joe now only owes $279.95 to his vendors.
But his bank account needs a deposit. If you keep consistent with the Accounts Payable steps, it shouldn’t ever get overwhelming to enter in and pay the bills. If your company has a lot of growth, and the Accounts Payable (including entering bills, writing checks, and filing) is taking you more than eight hours a week, then hire a bookkeeping service, because now you are spending more of your billable time doing a part-time job.
Joe’s Manual checks written.
Joe’s Bill Payments
9 Credit Cards I might have mentioned this in Chapter 2: credit card receipts are an accountant’s worst nightmare. The reason is that there are always so many of them! Unfortunately, if you use them for business, you must track them correctly. If you don’t, this is where you will lose the most deductions. There are two types of tracking for credit cards. Do you pay your balance in full each month, or do you pay your monthly minimum due? We’ll do the hard one first because that is what most people do, pay the minimum due.
This function can be done in QuickBooks Pro®, and is very easy. The first step is to enter the Credit Card payment amount due in your Enter Bills section of QuickBooks®. This is so you don’t forget to pay it. As I showed you in the Accounts Payable section, when posting your bill due to the credit card company, you post it to your credit card liability account. That way it is reducing your liability when you pay it. Your expense accounts will be increased when you enter in all of your credit card purchases.
Enter Credit Card amount due in the Bill section first.
Next, enter in all of your credit card charges from the QuickBooks® top menu, Banking, Enter Credit Card Charges. Enter your credit card charges by selecting this menu item.
In Chapter 2, we learned how to set up our QuickBooks® file and enter in credit card charges. I made a suggestion about keeping business and personal cards separate because now we need to learn to reconcile (balance) your credit card statement. If your credit card already had a revolving balance due, how do you know how much of it is business and how much is personal? If this is your story, this is what I want you to do. From your most recent credit card statement, enter in every charge that is on your statement from the Banking, Enter Credit Card Charges menu in QuickBooks®. If it is a personal purchase, instead of posting it to an expense account like office supplies or advertising, you need to expense it to your Capital Draw account. Face it, you used it for personal use and can’t write it off. Joe already had a balance due on his credit card for business purchases. On my QuickBooks® balance sheet account for his Credit Card I show a balance due of $1,008.95.
These were Joe’s start up expenses charged to his credit card.
Joe’s statement for August has an ending balance of $2,357.23. I know from his receipts that he has only charged $1,258.95, and then he made two payments of $125 each out of his business checking account.
According to QuickBooks® Joe only owes $1,008.95. We have a $1,350.28 difference. Below is Joe’s statement from his credit card company. From the QuickBooks® top menu, select Banking, Reconcile Credit Card. If your credit card window is closed, your menu might show “Reconcile.”
You can select which account you wish to reconcile from the pull-down bar.
Pull-down menu, select Credit Card, Visa (or whatever your card account is)
The first screen I’m going to see looks like this.
Enter your statement date here, and your ending credit card balance here.
Joe’s finance charge for Aug was $41.25; enter that here. The account it is expensed to is Interest Expense: Finance Charge. Click Continue
Looking at my statement and comparing it to what I have in QuickBooks®, there is a charge on my statement for $375.85 for The Men’s Warehouse that isn’t posted into QuickBooks®. We all know we need to look good for business, but unless you’re buying uniforms with company logos imprinted or sewn on the clothing, you can’t write off your business suits or pantyhose. Sorry.
I need to post the charge for $375.85, because it’s not showing up in my credit card account.
My account is out of balance by $1,182.03.
To post any missing charges not entered into QuickBooks® but showing up on your credit card statement, you can do it from your open reconciliation screen. Just select the Banking, Enter Credit Card Charges menu, record the missing charges, and click OK. QuickBooks® will bring you back to your reconciliation screen. Your new charges will now show up on your template.
The difference of $806.18 is Joe’s personal portion of the credit card balance due.
Now that all of Joe’s purchases are recorded in his QuickBooks® Credit Card Account, we have a true picture of what his personal balance due on this credit card is. I am going to make one more credit card purchase entry to finish reconciling this credit card.
We posted the purchase to Joe because they were his charges, and we don’t want to go back to the ice age and figure out who they were paid to. They are not expensed but applied to his draw account.
The memo is direct and to the point: Personal Purchases.
This time, I will make one lump-sum entry of $806.18 and post it directly to Joe’s Capital Draw account because this balance is not a business expense. Click on Save & Close to go back to your reconciliation screen.
Joe’s credit card purchases.
You can print a report and staple it to your statement, or just select Cancel to leave.
When your difference is zero, you can select Reconcile Now because your account is in balance.
If your credit card is still out of balance and shows an amount in the difference column, do not select Reconcile Now. Remember that account that I do not like, called Opening Balance Equity? QuickBooks® will create a journal entry and post the difference there. If for the life of you, you can’t find where you’re off, nine out of ten times, it’s either a finance charge that you forgot to enter, or you entered a charge with the incorrect sum. If it’s a minimal amount, enter in
another credit card charge and post it to Miscellaneous Expense. You’re not going to go to prison. If it’s a large amount, find it because you’ll want to know what it’s for, and you could go to prison. . . . Just kidding. If you pay your credit card balance off in full each month, good for you! Nice education on credit card reconciliation anyway because I made you read through that entire process. If you process your bills with the Accounts Payable bill payment, enter your credit card bill from the Vendors, Enter Bills menu, or of course click on the icon that says Bill. If you write your checks as soon as you get your bills in the mail, click on the Check icon. Notice that the templates are pretty much the same, except they have different names. You will enter in the credit card charges the same, whether or not it’s in a bill payment or a check payment. Here is how Joe’s credit card payment would look if he didn’t have a revolving balance and paid the balance off in full each month.
Enter in the balance due from your statement.
The charges are entered directly to your expense account, rather than your credit card liability account.
Make sure all the charges equal the amount due.
The only thing you will lose entering in your bills this way is a breakdown for each purchase by store or vendor name.
His total amount due from his statement needs to equal all of the credit card charges and credits from the statement. If it doesn’t, it will be out of balance and you will have to go through and make sure each charge adds up to what your total bill is. Normally it’s the interest. If you hired a Tax Preparer or accountant and at the end of the year you gave them a copy of your 173
QuickBooks® file, if they’re good, they are going to pick through it and find any unusual entries or mistakes that you have made, and they will correct them for you. Just remember, anything can be fixed. I’ve cleaned up the biggest accounting messes and created simplistic books. Of course nothing is free, and we’re worth our money too, but keep it in the back of your mind that mistakes are made, and so are corrections. 9 Petty Cash – This is the other not-so-fun task because you have too many receipts that pile up on your desk. If you want to be able to use the $4.74 that you purchased stamps with at the post office, then get out your nice little stack of receipts, and start entering them into your Petty Cash Account. This account is just like your bank account, except it’s under the assumption that you have a little cash drawer in your desk that you use for business expenses. If you have excessive McDonalds receipts and you’re not taking that suit-and-tie client to wine and dine, sorry, but you running down to the local fast food joint to buy a hamburger doesn’t count. However if you decide you want to buy a round of pizza for the fellows who have been putting in overtime, sure, write it off as a meal expense. Joe had a few receipts to post in his Petty Cash Account. After he was done, it seems he had some money left in his QuickBooks® account, yet he knows and I know he doesn’t have any petty cash left. This is what you do.
The final Cash entry goes to Joe and is posted to his Draw Account.
We posted all of Joe’s Cash Receipts for the year, and know that he doesn’t have cash left over.
Make sure when using cash, to keep good receipts. Cash is obviously the easiest place to hide problems, and the IRS doesn’t like cash because it’s harder to trace. Post your receipts as you would any other expense; they just don’t have a check number. 9 Fixed Assets We spoke about entering in Fixed Assets during Chapter 3, “Entering Startup Costs.” However, now that you’ve started up, what if you buy more? The process in tracking your assets does not change. If you purchase something of value for your business, it still must be entered in the correct way. Unfortunately we would all like to think that because we paid $4,000 for that new equipment, we can just write the whole thing off as an expense and not track it. Well, there are tax rules that allow you to write off up to a certain dollar figure each year on your assets. In bookkeeping and accounting you must still account for them the same way. Think of it this way. At the beginning of the year, I have your QuickBooks® file, I’m going through all of your entries and trying to prepare your business tax return and you’re paying me by the hour. If you are not making entry notes on your memo line even if you accidentally posted your purchase to the incorrect Chart of Account, I have to play the guessing game of what it is. What if you went to Office Depot and spent $625 on office supplies, yet your check memo didn’t say anything on it? To me that $625 could be an asset, because the dollar amount exceeds your standard paper and tape. It will take me longer to look through your files and call you to ask you what they were than if you tried your best to fill in the blanks. I’ll catch it if there is a mistake. Even if you tried to expense an asset – say you bought a computer, and your check entry in the Chart of Accounts, instead of going to Fixed Asset: Office Equipment, went to Office Expense. If there were a $2,000 entry in Office Expense, I would question you about it. I know it’s a pain and doesn’t seem fair that you can’t write the entire amount off immediately, but we didn’t make the rules. The more you help out your Tax Preparer during the year, the less likely they’ll charge you additional “Journal Entry” fees at the end of the year. 175
Good old Joe decided to purchase that new vehicle early because his broke down. He decided to finance it instead of leasing it because he doesn’t like the idea of renting something from someone and not owning it outright when the rental period is up. He bought a Mustang because he’s going through a mid-life crisis and wants that young sporty look. Joe bought a used one and it’s two years old. He paid $18,500 for it and only put $1,000 down. His loan is through Ford Credit. He needs to set up a new account in QuickBooks® because now his business has a new liability. When purchasing a new vehicle, you need to take your purchase agreement papers and use the total cost price including all taxes, license and delivery fees in your asset price. If you put money down on this vehicle, that will be a different entry into QuickBooks®. We want the cost of the vehicle first and will deduct any down payments second. From the QuickBooks® Chart of Accounts screen, click on your CTRL N key to make a new account. This account will be a Long Term Liability because Joe has five years to pay it back.
This is a long term liability.
Do not enter an opening balance.
To make your Entry into QuickBooks®, there are two accounts that you will be affecting, whether this is a car, field equipment or office equipment. If you are borrowing money to purchase this asset, the two accounts affected are 1.)
Long Term Liability Account (or short term if paid back within 1 year)
Fixed Asset Account
Instead of needing to make a Journal Entry (which bean counters are accustomed to), QuickBooks® has made its template user-friendly even for Joe. Double-click on your newly created Liability Account, and you will be in the oh-so-familiar template, with just a different name and account type. Joe is going to enter in his purchase the same way he enters in the check he writes out. He is increasing the balance due to Ford Credit, and his offset account is Fixed Assets: Vehicles. But remember, Joe put $1,000 down on the car, and only owes $17,500. He used $1,000 out of the Company checking account by writing a business check. That entry would look like this.
New Loan balance.
If he paid the “down” out of his personal bank account, the entry would be posted from his Capital Contribution Account. The reason why the check is being applied to the Ford Credit Liability Account is because the Fixed Asset value isn’t changing, only the amount of the loan. 177
Now the fun part is making the payments on the loan every month. This is where you will make your errors. Most clients just enter their car payments to vehicle expense. Gas is a vehicle expense; your car payment is paying two things. 1.) Interest on the loan (which is an expense) 2.) Principal on the loan (which is a liability) So if I’m making one payment per month, that needs to go to two places; yet I haven’t a clue how much of my payment is principal or interest. Remember the interest calculation I made you do in Chapter 4? You can apply that here too. Joe’s interest was 6% on the loan. $17,500 x 6% = $1,050 annual interest. Divide your annual interest by 12 months, which equals your monthly interest of roughly $87.50. If Joe’s payment from Ford is $379.16 per month for five years, the amount of the principal payment is $379.16 - $87.50 = $291.66. ($291.66 x 60 months (5 years) = $17,499.60. So my monthly payment to Ford Credit would like this.
Expense Account. I split the accounts so I can book in my interest expense.
QuickBooks® also memorizes checks and transactions so that you don’t forget to pay something or someone who requires a consistent monthly payment. This would be a good place to memorize this payment so it would automatically enter in your books in case you
forgot to write a check one month. To memorize a transaction, have the entry open that you would like to memorize; then from your QuickBooks® top menu, select Edit, Memorize Check or CTRL M. Select Automatically Enter, Monthly (or however often you pay the bill). Make sure you mark it to be printed; otherwise you will think you already printed and sent out the payment, when it never left your computer.
Automatically enters into QuickBooks
When you purchase other business assets, remember when entering them into your computer to ask yourself the two main questions. They are always the double-entry bookkeeping questions. 1.) How did you pay for the asset? a. Did you pay for it outright? Did you write a check out of your personal or business account? b. Did you finance it, whether it’s from your personal equity line, credit card or a new loan? 2.) What type of asset is it? a. Where would it go on your Chart of Accounts asset list? (Office Furniture, Office Equipment, Vehicles, Field Equipment?) 179
Once you can answer those questions, you can enter in your new asset by either writing a check and posting the check to the Fixed Asset Account rather than an expense account. You will need to create a new liability account if you have a loan on the asset. If purchased on a credit card, enter the purchase via “Enter Credit Card Charges” and apply it to your Fixed Asset Account. If Joe was loaded and paid cash for his vehicle out of his business checking account, this is how his entry would look.
His payment would go straight to the asset account because he doesn’t owe anyone anything on this vehicle.
You will be able to recover the Depreciation Expense at the end of the year when your tax returns are filed. Your Tax Preparer or CPA will depreciate your assets for the allowable life of the asset. I’ll explain a bit more on Depreciation in Chapter 8.
9 Inventory I taught you how to enter Inventory Items during your Accounts Receivable lesson because that was the easiest place to show you why it’s important to enter your data correctly. Now you need to know how to track your inventory and make sure your reports are correct. What happens at the end of the year when you go to file your business tax return, is that you will need to have a physical inventory for your Tax Preparer so that you get every possible expense booked in that you can. If your inventory is off, you will end up losing Cost of Goods Expenses on your taxes; because the general rule for the IRS is, what was your inventory at the end of the year (on your last year’s tax return) plus any additional inventory purchases that you made throughout the year, minus what physical inventory you have at the end of the current year, equals what they are allowing you to expense or write off. Example: at the end of last year, Joe’s inventory value was $1,350; he purchased $2,750 during the year; and his physical inventory at the end of the year was $725. $1,350 + $2,750 - $725 = $3,375. Joe sold $3,375 worth of his inventory throughout the year. If his QuickBooks® isn’t set up the correct way, your QuickBooks® file will never expense the value correctly each time you make a sale. Just like everywhere else, your inventory is making its double-entry bookkeeping for you. It always goes from one place to another place for checks and balances. Your inventory is an asset until you sell it. But your asset is first a liability because you have to buy it. The inventory value is always the cost value and never the sale value. We all know Joe’s book cost him $7.95 to buy wholesale, but he sells it for $39.95. So when you’re creating your item accounts, if you enter the wrong costs for your products, your inventory expense is going to sit in limbo unless you have a really sharp accountant to fix it for you at the end of the year. Each time Joe makes a sale, QuickBooks® is going to take the dollar figure that I entered in for the Cost of the product, and move it from the Inventory Asset account to the Cost of Goods Book Account.
Make sure your Cost of Goods are not mixed up with your Sales
If your vendor changes his price and you need to modify your cost, you can edit the price in this template as well as changing your price if need be. If you run out of inventory in QuickBooks® yet still make an invoice for that inventory item, QuickBooks® will yell at you and tell you that you don’t have sufficient inventory to place that order. If this happens and you really are out of inventory and you want to process the invoice anyway, QuickBooks® will still make its posting entries to your inventory and Cost of Goods account, but your inventory will now have a negative number.
I try not to take the yelling personally…
My inventory is now short.
To run your inventory reports, from the QuickBooks® top menu, select Reports, Inventory. There are a few reports to choose from. I like the Inventory Status by Vendor because if you forgot who you ordered it from last time, this will remind you without making you feel like an idiot. I also like the Physical Inventory Worksheet.
It will remind you to walk the inventory to make sure your physical inventory matches QuickBooks’®. If it doesn’t match and by a significant amount, you need to figure out why. If you are only off by a few pieces, the easiest way to account for lost pieces of inventory is to create a QuickBooks® dummy customer account for Samples. We all give them out, and nine out of ten times they are part of our inventory valuation because we could still sell them for the same price that we would all of our other inventory. It would be a lot different in tracking your “Samples” if you were a large corporation who had a special inventory just for samples, but we’re not. We’re the Ma and Pa businesses who still give a piece of our inventory as a sample. Joe has to replenish his inventory because he just sold out on books and needs to fill his order.
I’m going to order more books from Mr. Printer.
Remember, inventory is entered in the Items section,
not the Expense side.
Joe ordered 50 books, and was in the hole 10. He now has 40 books in his inventory.
But wait, Joe has given away about 15 mouse pads in the past week to various customers and of course family because they keep begging for free stuff. Here is how Joe is going to handle his samples to make sure the books are clean and easy to follow.
Today’s my birthday… I make a customer account called Samples and override the sales price to zero.
Once I override the sales price for samples to Zero, QuickBooks® has reduced the inventory value by 15 “samples” and booked in the cost of the product to my COG account. Yet it hasn’t affected the sales because Joe hasn’t received any money for the items. 184
If I print a Customer Detail Report, I can see how many samples Joe has been giving away and tell him to quit giving away the bank . . .
If you are a retail store and want to use QuickBooks® for your business, I highly suggest you purchase the Point of Sale version of QuickBooks® and take a class. Inventory tracking for retail stores is a lot more in-depth and complicated and cannot easily be explained to the standard Joe in a 340-page book.
9 Job Costing If you are in a specific industry where your sole purpose for trying computerized bookkeeping was to try and cost out your jobs, QuickBooks® has made it relatively easy to do this. If you have the basic knowledge of bidding your jobs for profit, it won’t be as difficult for you as for the next guy, namely the construction industry. Every industry is so extremely different, but the accounting principle is the same. You want to know how much to charge and if you’re making a profit off of your service or product. In construction, the math calculations that these guys have to do blows even me away. I could never claim to know how to come up with the PSI for concrete, or why a yard has to be measured in cubic feet. I think dollar signs, but they are the main industry that comes to me for help, because they think in measurement and not dollar signs. They can bid jobs like there’s no tomorrow, but putting it together in layman’s terms to see if they are making money on that job is what they need. If you haven’t noticed, I do hold a high respect for the construction industry because no one appreciates them, yet they’re the reason why you have air conditioning in your nice office, electricity going to that cozy little kitchenette, and the computer can plug into the wall. If you’re ever by a construction site thinking it must be nice to work outside all day, tell that to the guy who has to crawl through insulation in an opening in a two-foot attic. You think the framing material is easy to carry? Try lifting beams that way twice your weight and making sure they’re fastened to the footing correctly, and if they are not exactly level you have to start over. Then to have the customer say, Oh, I wanted Palm Trees, or that color doesn’t look like what I thought it would be. I’m not going to pay for change orders, your prices are killing me, and so on; and they have absolutely no clue about the labor intensity it took to get there. I think the most idiotic comment that I have heard is, “Now try selling TV Time, that’s a tough job.” They wouldn’t last five minutes out in the nice sun all day. Skin cancer, yeah they have that too. So if you’re not in the construction industry, shoot a little respect and 186
appreciation their way because it’s got to be one of the most difficult jobs out there. Okay, I feel much better now. . . . There are going to be two main steps in costing your jobs. The first is keeping track of all the bills that you have to pay that are related to those jobs. If you have multiple jobs going on at one time, you are either going to track them by Customer Name, or Job Number. If you have one customer that has multiple jobs, you can create Sub-Accounts with the customer jobs just as we did in setting up your Chart of Accounts. Even though Joe’s industry doesn’t have a lot of sub-contractors and materials to make a product, we can still cost his job. Let’s say that Joe landed a new Web design account for a big company and he is going to have Scott handle the Web page designs. The big company has three franchise companies that need Web design. He is figuring that it is going to take Scott at least two weeks to design each company’s Web page. We will bid it out at $79 per hour for Scott at 2 weeks x 40 hours per franchise. Total hours we anticipate to spend on this job are 240 hours (80 x 3 franchises). At $79 per hour, Joe will be billing out The Big Company $18,960. Joe will have to have another DSL line put in just for this account. Bell Telephone is going to charge $325 to do this. The only other Cost of Goods that Joe has for this job is Scott. The first thing I need to do is add The Big Company to my customer list. After I do this, I need to create three franchise companies to separate the invoicing and billing so we can cost the jobs out by themselves. From the QuickBooks Customer Job Template (click on the Customer icon), press CTRL N to add a new customer. Once you enter in the address and billing information, click on OK to record.
To add jobs to this customer from the bottom of the template, click on Customer Job, Add Job.
Click Add Job (there isn’t a shortcut here)
You can enter in the project or job information so you can track in progress jobs on your reports.
Enter Job Name here. If you go by numbers, type Job number here.
This is what my customer list looks like now.
Click OK to record your new job(s). Now that they are on your customer list, you can invoice each job separately. Joe made an agreement with The Big Company to bill them 50% up front, and 50% upon completion of the job. So in order to do this progressive billing, Joe needs to make an “Estimate” for each of the jobs.
To do this, from the top menu, select Customers, Create Estimate.
Make sure the “Estimate Active” is marked; otherwise it won’t show up on reports.
You must print the estimate from this template. Click Save to record your estimate.
Once you have created a customer estimate, when you go to bill that customer, even if it’s not for another estimate that you created, QuickBooks® will prompt you with a screen that says “Available Estimates.” To bill for these estimates, click on the QuickBooks® Invoice icon, or select from the top menu, Customers, Create Invoices.
Click on the estimate that you wish to create an invoice from.
If you’re not creating an invoice from an estimate, just click on cancel and you will go straight to the Invoice template.
Make sure you click on the estimate that you wish to bill. Because Joe is only billing for 50% up front and the other 50% upon completion of the Web design, our next screen in QuickBooks® is going to let us select how much of this estimate we want to bill for.
Type in the amount of the job you wish to bill here. You can of course also bill 100% of the job.
QuickBooks® will calculate the total invoice based upon your selection.
Joe’s invoice shows an estimate amount of $6,320, and he has billed 50% of that estimate at $3,160. When Joe has completed the job, he will go to bill the customer the final balance due by simply selecting the open estimate from the Invoicing template. QuickBooks® will pull all of the estimate data and ask you the same question as above: Do you want to create an invoice for the balance due, or for another percentage of the estimate? You can modify your Invoice template to include additional information to better suit your industry. To do this, select the Edit Template icon on your invoice. General progress invoices include date, estimate amount, percent complete and percent billed. If you create a lot of estimates for jobs, you must be on top of the billing and make sure they get billed 100% when completed. The following report in QuickBooks® will help remind you who
you still need to bill and how much you have already billed them. It is called the Job Progress vs. Estimate report. To get to this report, on the top menu, select Reports, Jobs & Time, then, Job Progress vs. Estimate.
You can print a variety of Job Progress repots.
Here you will be able to see if you forgot to bill a customer for the balance of a project.
Progress Complete on job.
Progress amount billed to customer.
Let’s say that Joe’s employee Scott has spent his first 20 hours on the Mini Company #1, and we want to see how we would track our costs. When tracking Scott’s time in QuickBooks® there are two options. You can enter his time in on a timesheet, or you can enter it in directly from Scott’s Check. I like the Timesheet, because you can print it out and put it in their employee file.
If you have office labor with billable time, the Timesheet works really well. If you have blue collar workers, the Timesheet is just a duplication of their timecard, and entering it directly on their paycheck is sometimes the fastest and easiest way. I am going to bill Mini Company # 1 directly on the paycheck, and Mini Company # 2 on the Timesheet to show you they end up in the same place. Keep in mind, when you are trying to cost your jobs and you have employees, the first place you are going to lose your profits is in payroll if you don’t track your time per job. If there is a reason why Scott took 96 hours to design this Web page rather than the estimated 80 hours, your profit and loss is going to show a loss. You have to try to figure out where. If your job costing is set up the correct way in the beginning, you can immediately see where by the click of a mouse.
On Scott’s paycheck, I manually entered in the time and client information.
If you use a payroll service, see Chapter 6 for payroll instructions; however, in order to track your time or your employees’ time, you still need to enter the hours on the timesheet. If time tracking is not set up on your current QuickBooks® data file, from the top menu, select Edit, Preferences. The left hand column will have an icon that says “Time Tracking.” Click on the Icon, and select “Company Preferences.” Click yes for tracking your time.
QuickBooks® will set up the files it requires to track the time.
Click on Company Preferences and Yes. Time Tracking icon
To find the time tracking sheet, from your top menu, select Employees, Time Tracking.
Employees, Track time
On Scott’s timesheet, I entered in each day’s activity, making sure I’m in the correct billable week. In QuickBooks®, if you use an Estimate to create an invoice, your purpose for tracking time is mainly for job costing. If, like accountants, consultants and attorneys, your purpose is to bill your client for your time, the time tracking system works perfectly to bill straight across for your time. On Scott’s Timesheet, I need to unmark the invoice icon on the Timesheet; otherwise
QuickBooks® will tell me that I have unbilled time for this job even though I already billed it through an Estimate.
If you are billing for your time, and not on an estimate, unmark this icon.
Everything on this time sheet is the same as on Scott’s paycheck.
If I didn’t give a fixed price bid for this job and I could bill it all for time and expenses, when I create the invoice and have the above invoice icon unmarked, my billable time invoice would look like this. From the QuickBooks® Invoice template, I click on the icon that says Time/Costs.
Click Time/Costs to see all time and expenses that need to be billed. Select all that you wish to bill. Click OK.
All of the time and expenses that you select will be transferred to your Invoice.
This will show the client in detail what days and items you are billing them for.
When you start tracking your expenses related to your jobs, you will track them on the checks you write, credit card purchases or petty cash. Each QuickBooks® template has an entry field that says Customer/Job. This is where you would track all items related to job costing. For instance, Joe had to get an additional DSL line just for this client. His check to Bell Telephone looks like this.
Customer Job Information. I had to divide it by three to track how much per job.
Because the cost to do this Web page was included in my bid, I will not bill my client for this DSL fee. I do not mark the Invoice icon.
When costing your jobs, you need to keep in mind that your indirect expenses like rent, telephone, utilities and office supplies are your business’s overhead. Your job costing is your “Cost of Goods” like we set up on your Chart of Accounts. You bill The Big Company for $6,320, your labor was $3,500 and your extra DSL line was $325. This job has cost you to date: $3,500 plus $325 = $3,825. If you billed $6,320, you have made $2,495 ($6,320 minus $3,825 = $2,495) Gross Profit on the job. The reason you want to cost each job separately is to see where you are making or losing money based upon your estimate to perform the job. What if you are bidding too low, and your gross profit at the end of the job is only $500? What if your monthly overhead is $3,000? You are now showing a loss of $2,500, which means you are not bidding your jobs correctly. Giving yourself an excess salary and buying a Hummer does not qualify for reasonable overhead either. The company needs to live within its means, and you cannot reap the benefits of a Hummer until your overhead is paid first. If something is left over after that, good for you. Now you deserve a raise and a Hummer! I want to print out Joe’s Job Profitability Report to see what shows up. From the QuickBooks® top menu, select Reports, Jobs and Time, Profit & Loss by Job.
Job profitability summary.
I prefer the Profit and Loss by Job report because it breaks down the report by account listing. You need to modify this report because as soon as QuickBooks® pulls it up, it will include all jobs that you currently have in the customer list.
Click on Modify Report Sort by Customer Job.
Change the date range to include all so you can see from beginning to current.
If you want to show all, Leave it as is, but to show you how to view just one job at a time, click on Modify Report. In this screen, click on the Filters tab. Select Customer Name.
Highlight Selected Names so that you can pick which one you want. Click Filters. You want to “filter” the Name list I’m going to choose Mini Company #1.
If you are running multiple jobs for one main company, you can modify the settings for viewing report types in this template. For Joe, his is a little overkill for his needs, but at least he can see where his employee time is going on a job. The one problem that you might have in trying to
create this report is if you are on a Cash basis (when you set up QuickBooks®). If you billed your customers, your income will not show up on this report until they pay the invoice. To include it on this report, click on the Modify Screen once again, and instead of selecting Filters, stay in Display. If you notice on this screen it has a box that says Report Basis, Accrual or Cash. You need to select Accrual to see what has been billed. Click OK to record.
Select Accrual to view billed invoices on this report.
Just because you need to change how a report calculates, based upon Cash or Accrual, doesn’t mean that you changed the way you’re filing your taxes. It’s only a report, and it’s just for internal accounting records. So don’t worry, you’re not obligated to change everything. The following page is going to show you the Job Profit and Loss Report. This is where you can take a good look at your business to see if you are billing your customers enough for your service or product.
Mini Company #1 (The Big Company)
Total The Big Company
Ordinary Income/Expense Income Gross Income Web Design Total Gross Income Total Income
Cost of Goods Sold Cost of Goods Sold DSL Connection Gross Labor Total Cost of Goods Sold Total COGS Gross Profit
For this one job, Joe has already made a Gross Profit of $1,974.39. Because we have only billed 50% of the job, our Gross Income to date is only $3,160, and with Labor and DSL service, it has cost Joe $1,185.61 out of his pocket to perform this job. If you are in the Construction Industry, or sell a product, there really isn’t any difference in costing your jobs. It’s just all in how you post your bills and invoices in the bookkeeping system. QuickBooks® will track the rest for you. The job costing functions are pretty much the same for each industry. You have your product or service income vs. your product or service costs. This is where you might need to add new Cost of Goods accounts if you see you are missing something that you wanted explained and broken down in more detail. Only you know what it is that you do or sell. You’re the expert, which is why you are charging someone for it. If you are in a specific industry where you need better tracking, this is a little more time consuming, but it will help you keep on top of your jobs. QuickBooks® does have a budget system that works really well for Job Costs vs. Job Budgets. I have my own integrated spreadsheets that I have created for the construction industry, called W.I.P. (work in progress) reports; but for some clients, using QuickBooks’®
internal budgeting works perfectly well. I am going to show you some examples using a construction company file. I can’t use Joe’s because he isn’t in the right industry. His income is mainly based on time. For Rock Castle Construction, I am going modify and set up a budget for a Wet Fire System. The first step would be to take the Estimate created for the construction, and your bid sheet. We will set up a budget based upon its numbers. When creating a job budget, just because your estimate says $45,527, that doesn’t mean that’s how much you have to spend on this job. You want to make some money out of that, don’t you? Your budget numbers are your bid numbers. It’s just different terminology. My bid is broken down by Cost of Goods category, yet tracked to one income account because construction is so in-depth. My Income Account for this company is Commercial Construction. There are too many sub-items that would create a paper trail nightmare. This is what my Estimate from the construction company looks like.
WET FIRE SYSTEM (THE BIG COMPANY) Client Estimate Client Estimate DEMO PREP DEMO
TRENCHING FIRE ARREST SYSTEM ELECTRICAL Contractors O/H & Profit Total Estimate
7,584.00 11,676.00 4,290.00 9,105.00 45,527.00
From the QuickBooks® top menu, select Company, Set-Up Budgets. In this screen, you can select what type of budget you want to set up.
Set Up Budgets
Since we want to track the budget on our jobs, and make sure we don’t go over, this will be the best possible tool that you can use when you’re a small business. The budget screen will allow you to adjust your budget numbers in a twelve-month time period. If your job is going to last you six months, you can plan each month’s budget numbers based upon what sub-contractors or portion of the job you are building.
I first select the Income account to track how much I am charging for this job.
I made an arrangement with my client to bill 100%, and will receive it in March. (As if that would ever happen.)
In order to budget by job, I must select the customer or job number here.
Click on Save to record your entry. Your screen will not go away.
Once you select the account information on your budget screen, QuickBooks® won’t take you out unless you click on OK. This way, you can continue entering in your entire job. If you click on Fill Down, QuickBooks® will take the first dollar figure you typed in the month box and fill it all the way down the twelve months. If you didn’t want this to happen, just type $0.00 over the incorrect ones and click Save to change it. The next part of the budget that I am going to add is the Cost of the Job. The first cost on my bid sheet (estimate) is Demo Prep. My estimate says $640. If I know what the bid was from my sub-contractor on this portion of the job, that will be the number I type in for the budget. On this particular job, I had a 10% contingency factor added to my sub-contractor’s bids to come up with the estimate amounts. You can include your contingency or not. I included it in mine, so some of my bid numbers equal the estimate.
I change my account to Cost of Goods, Demo Prep to track the budget.
This portion of demo will be done in March.
I click on Save to record this portion, then change the account name to the next cost of the job which is Demo. In my Demo budget, I anticipate this portion of the job to be competed in April. We will pay this sub-contractor off when the work is complete in April. If you sit on your bills for 30 days and the work was performed in April, yet not due until May, you would type in the
budget dollar amount for the month you intend to pay the bill. The next portions of the job are for Concrete, Paving, and Trenching.
You must fill out each cost separately if you want your budget numbers to calculate correctly. Keep in mind that this is just internal budgeting; these numbers will not affect your double-entry bookkeeping or your actual financial statements. They will just give you a comparison of what you think your job should cost. In March and April, we split the amount for the Fire Arrest System to the sub-contractor for a deposit payment and final payment. The budget looks like this.
You can split the budget amount, but make sure every entry totals your bid total for that part of the job.
The only part of the budget that I don’t include is my contractor’s overhead and profit. This dollar figure is based upon your markup for the job and your Company’s overhead. Since we don’t track overhead to a job, just the hard costs, the budget numbers are just the hard costs. The Profit is what we hope to make on the job and the Overhead is what we hope to cover for our reasonable office operating expenses. If we’re lucky, we’ll make at least 7% profit on this job. To see my job budget, I want to run a report called Profit and Loss Budget by Job Overview. To find this report, from the QuickBooks® top menu, select Reports, Budget, Profit & Loss Budget by Job Overview.
This is only showing the budget number; there aren’t any actual numbers here. Doublecheck your entries to make sure they are correct.
Once your job starts and you begin to pay subs and vendors for materials and time on this job, you can run progress reports to show you where you are at. This is a very helpful tool to show you if you’re going over or staying under your job’s budget. As long as you can enter your budget numbers correctly, and keep on top of how you write your checks to your vendors and subs by including the job or customer name in the check, you will have no problem tracking your jobs. I’m going to run the Profit and Loss by Budget report to see how we did on this job.
When the job is 100% complete, I file a copy of this report with the job so I have future reference to my numbers. 21-0102 WET FIRE SYSTEM (THE BIG COMPANY) Jan '00 - Dec 01
$ Over Budget
Ordinary Income/Expense Income 1350 · GROSS INCOME 1350.01 · COMMERCIAL SALES Total 1350 · GROSS INCOME Total Income Cost of Goods Sold
1375 · COST OF GOODS SOLD 1380 · BUDGET COG'S DEMO PREP
GROSS LABOR WAGES
Net Ordinary Income
FIRE ARREST SYSTEM ELECTRICAL GENERAL CONDITIONS
Total GENERAL CONDITIONS Total 1380 · BUDGET COG'S Total COGS
On this report, QuickBooks® will show you a “negative” value, which means that you are under budget. You had money left over in the kitty on that portion of the job. If you have a positive number, that means you went over your budget. If you look at the Fire Arrest System, the Estimate was for $12,000; however, it cost us $13,728.48 for that portion of the job. We went over budget by $1,728.48. At the end of the job, we came in under budget by only $932.70. That’s better than a poke in the eye. Our Gross Income before the Company’s overhead was only $7,848. If I run a Profit and Loss for the month of March through April and see what my Company’s overhead was, I can see where my net profit margins are. If my overhead per month 205
was $3,400 (that would be the day!) for two months, it would be $3,400 x 2 = $6,800 total. To figure your percentage on this job, divide the Company’s overhead of $6,800 by the Gross Profit on the job of $7,848 = ($6,800 / $7,848 = 87), You start with 100% profit, therefore you need to subtract that to .87 to come up with your percentage rate. 100 – 87 = 13%. Our net profit on the job was 13% while our Gross Profit (before Company overhead is 17%). QuickBooks® can modify your reports to include a percentage ratio so you can see what profit percentage you fall in. In Chapter 8, I will show you the reports that would best be used for your business, and explain how to modify them to include percentages. When costing your jobs, follow these steps so you have consistent and accurate paper. 1.)
When entering Vendor bills and checks, make sure to fill in the customer-related job on the bill or check, or you won’t be tracking your job costs.
If you have Employees, track their time spent on each job by processing their payroll check or Timesheet.
If you have Sub-Contracted Employees, when writing their check, fill in the customer-related job in the Customer/Job Field of the check.
If you bill by Time and Reimbursed Expenses, run an: a. Unbilled Time by Job Report (under Reports/Jobs) so you don’t forget to bill a customer. b. Unbilled Expenses by Job Report (under Reports/Jobs) so you don’t forget to bill for expenses.
Run a Progress vs. Estimate Report so you don’t forget to bill for retentions or unbilled portions of a job.
Run a Job Profit & Loss by Budget Report during and at the end of each job.
Try to get your vendors to use a Job Number as a Purchase Order number when ordering materials so that you know what it was for.
9 Bank Reconciliation Now that you know how to pay your bills, invoice your customers, and receive their payments, the final step is to make sure you have as much money in the bank as you think you have. The only way to successfully do this, as we know, is by reconciling or balancing your checkbook. Your checkbook, instead of being a nice little blue folding book with checks in it, is now a computerized databank with checks entered in it. The beauty about the difference is that it’s a lot easier to reconcile a computerized version of your checkbook than a manual checkbook. I taught you a simplistic way of reconciling your credit card statement a few lessons back, and balancing your checkbook is the same thing, only a different account. It is very important that you find time to do this. The worst thing that you could do is not to balance your checkbook. All this hard work and education you have just invested in your business will be damaged if you don’t keep on top of your balancing. There is no other way of knowing what you have or what checks have or have not cleared the bank. What if the bank posted a deposit incorrectly that you made? If you put $2,500 in the bank and the teller entered the deposit to your account for only $1,500, wouldn’t you like to know about it before all your checks start bouncing? There is nothing worse than trying to reconcile a bank account that has never been reconciled. Unless you go back to the very beginning, you will never know what went in and out of your checking account. You need to know how much money you have in your possession at all times. If you don’t balance your checking accounts, I can guarantee that your books will be a mess and you’ll have to start over to fix it. Or hire me to do it for you, and that will cost you a pretty penny. Joe’s bank statement finally came in, and it’s time to balance his business checking account. (By the way, when I told you that you that you must reconcile your checking account, that does mean all of them including your personal accounts!) 207
From the QuickBooks® top menu, select Banking, Reconcile.
Have your bank statement next to your keyboard so that you can start manually marking off the checks and deposits that have cleared the bank. Look at the beginning balance on your bank statement – it needs to match your QuickBooks® beginning balance. If the company is new and it’s the first time you are reconciling, the balance should be zero.
Make sure you’re reconciling the correct account.
Enter the statement date. Joe’s beginning balance on his bank statement is $1,037.00; we’re okay. Enter in the Ending balance from your bank statement here. Joe’s is $6274.54
If your beginning balance is incorrect, I will show you how to try and find it in Chapter 9. I know that Joe entered in his bank service charge already on the checking template, and his bank doesn’t accrue interest income on a checking account. Once I am sure that my beginning balance, ending balance, date and service charges (if any) are correct, I click on Continue. The next screen is going to show you all of the checks and deposits that are currently un-cleared in your QuickBooks® checking account. This screen will not show any cleared transactions.
To clear an item from your checking, take your mouse and click next the item that has cleared by making a checkmark.
This side is your deposit and credits.
This side shows your checks and payments.
Take your bank statement and begin by marking off the items that have cleared the bank. Mark them on your Reconciliation template in QuickBooks at the same time. I notice in reconciling Joe’s bank statement that he has some ATM charges that he forgot to enter into QuickBooks®, and he is missing a deposit that he made on September 1st for $650 . . . probably because his account was cutting it close. Joe needs to find out where that $650 came from. If it was a customer payment that he forgot to post, he needs to enter it in correctly so that it can clear up a customer invoice. In this case, it was from Joe’s personal account, a Capital Contribution. From this template I can make additional corrections and entries without having to close out my reconciliation and interfere with my end result. 210
Do not click on Reconcile now if your account is out of balance. QuickBooks® will make a journal entry that I don’t like to that sloppy account to adjust any differences in your balance. If you must leave, click on Leave so that you can come back and finish reconciling. To make Joe’s missing deposit, from this open template, I will just select from the QuickBooks® top menu, Banking, Make Deposit.
Enter in your deposit as you would normally. If it’s an open invoice, you must receive the customer payment first.
Click Save and Close and you will be brought back to the reconciliation template with your new deposit showing up. Use the same process in entering forgotten ATM charges and withdrawals; press CTRL W or click on the Check icon to enter those items.
Joe needed gas, and probably got a big gulp too, but it didn’t show up on the receipt.
After entering in all of the missed items, I continue reconciling by clearing them in QuickBooks® in hopes that my account is balanced out to zero.
Double-check QuickBooks’® total checks and deposits cleared total, to your bank statement cleared total.
What a bugger, it’s one cent off. It’s always that one cent.
Murphy’s Law will always have a few pennies off at some point or other. This time, Joe’s is on purpose, of course, so that I can show you what to do. I compare the total checks that the bank cleared vs. the total checks QuickBooks® cleared, to see if the difference is on that side of the fence, or if it’s on the deposits side. In this particular instance, I notice that the total checks and withdrawals according to my bank statement are $3,772.65, and QuickBooks® says the checks were $3,772.64, so there it is. Now which check is off, and is it worth it to search for a penny? If it takes you longer than 5 minutes, it’s not worth it, but let’s look anyway. Scroll through all of your checks and re-match them to your bank statement to see which one is off. Once you find the check (Joe’s is the one written to the E.D.D., check number 1005, for $20.64), pull the check out of the envelope that the bank sent to you (hopefully the bank sends you your canceled checks; if not, request them), and see what it was written for. Joe’s was written for $20.64, but the bank cashed it for $20.65. If it was more than a penny (that is, worth your while to waste time on the phone arguing about, call the bank to correct it.)
Otherwise, just go to the incorrect check, double-click on it to open up the actual check, and make an adjustment to the check. It’s not going to damage or ruin any of your reports over a penny. This is how I would correct Joe’s.
Change the total check amount to the amount that cleared. Joe’s would be $20.65
Create an Expense account called Cash Over-Short to apply minimal amounts that are out of balance.
Because the check paid liabilities, and you don’t want to change those amounts, click on the Expense tab.
You can create an Expense account called Cash Over-Short to post minimal differences if you can’t find where your account is not balancing. If the amounts are significantly more, try to find out where it is off so that you can properly reconcile. If, for the life of you, you can’t find it, and it’s not too much of an amount (say, no more than $75), enter a dummy check for the amount it’s off and post it to your Cash Over-Short Expense account. To write a dummy check in QuickBooks® all you need to do is enter in the date, amount, account and memo. You don’t need to enter in a payee name.
Now that Joe found the penny, he can finish reconciling his bank account. All of his transactions are cleared, and the difference between the ending balance and cleared balance is zero.
We can click on the Reconcile Now, and QuickBooks® will clear all the items that have cleared our bank.
The correction to the E.D.D. check.
My biggest pet peeve is an accurate paper trail. Just because it’s reconciled and accounted for on the computer doesn’t mean that everything is safe. If your computer crashed and you were unable to restore your accounting data, what proof besides your paper do you have if you don’t also have a hard copy? Make sure you print out your reconciliation reports and staple them to the bank statement that they balanced against. Once the account is reconciled, QuickBooks® will ask you if you would like to print the reports, and which one.
Select Print both reports.
Difference is now $0.00
An older version of QuickBooks® may only ask you to print the detail, and you will have to print the Summary from the reports section. If this is the case, and QuickBooks® takes you to the Detail Report, it will look like this. Print this report out, then from the QuickBooks® top menu, select Reports, Banking, Summary to print out the Reconciliation Summary Report, which looks like this.
Bank Rec detail includes all transactions.
Bank Rec summary shows beginning balances, cleared and non-cleared, and ending balances.
If anything ever happened to your computer data file, you would have a detailed listing of all your checks and deposits that would match your bank statements, which in the long run would make it incredibly easy to recreate or prove each income or expense. Don’t forget to consistently 215
back up your data just in case. Once your bank accounts are reconciled, you have confirmed the cleanness of your books. If you are consistent with it, it should never become such a burden or a mess that you couldn’t handle it. The other beneficial part of this entire learning process is the fact that now you know how to do it, and you always have the ability to review another bookkeeper if you have to hire one. You will never be blind-sided with an “I didn’t know” or “How could this happen?” should something within your business finances go astray. That is the most valuable lesson you could possibly give yourself in business 101.
Chapter 6 Employees, Payroll and Sub-Contracted Employees
I have formed my own opinion in the past 14 years on whether or not hiring an employee is a wise move. It depends entirely on how big or small your business is – that is obviously the question. In my case, my clients preferred that I handle their confidential accounting matters, and so anytime I hired an employee, it was always more of a burden than anything. Let’s face some simple facts: employees think differently than business owners, and that will never change unless they become self-employed themselves. We’re not talking about a mid-sized or large corporation here; and frankly, if you’re buying this book, it’s because you’re a small business, either just starting out or wanting to set your books up computerized without having to pay me an arm and a leg to do it. So that being said, the truth about an employee is they constantly feel you owe them everything. They never seem to let it click in their head that you’re not a millionaire yet, but think you have oodles and oodles of cash flow that you’re not sharing with them. Then they start to get bitter about it even if you try to take care of them with Christmas bonuses, gift certificates, or anything that you can afford at the time without upsetting a vendor because you’ve just missed your Net 30 bill due by 15 days. Unless you find that one-in-amillion employee who works diligently because they care about the quality of work they do, then be very careful. There is so much baggage that goes along with employees that you don’t realize until you’re there. Sometimes hiring a temp from a temporary agency is the best move you could possibly make. It removes you from the Workers Comp liability, Health Insurance, benefits, paid vacations, FICA and Medicare match that you have to pay the IRS for each and every employee that you have, plus the State Unemployment Insurance. If you hire a temp, yes, your fee is going to be more than you would pay for an employee, but everything I just described 217
above is included in that number. You would have added those fees to their wages anyway. Just because you think you’re paying Suzie Q $10.00 to answer phones and type, you’re actually paying her, if in California, $11.45 per hour when you add the Company portion of tax liability and Workers Compensation insurance to her hourly wage. So if a temporary agency gives you a bid of $14.50 per hour for that same $10.00-per-hour employee, it is worth the $3.05 to not have the liability of an employee hanging around your neck. What if you hired an employee and in a month you weren’t so busy? If you had to send them home early or even lay them off for a while, they’re going to file unemployment on you. Your unemployment rate just went up because of it. At least you can tell them without feeling guilty that I only need you for the next three weeks, then call them back a month later when you get more work. They are temps, and that is what they do. You can find temps who don’t want full-time permanent employment. You just need to make sure you tell your temp agency that you’re not looking for a permanent employee. The beauty of it is that it will take all of the tax forms, employee forms, W-2’s, IRS and State Tax liability payments and Workers Compensation requirements away from your job. You pay the temp agency, and they pay their employee. There are many different types of temp agencies that accommodate just about every industry. There are Construction/Laborers, Clerical, Chemists, Legal, Assemblers . . . the list goes on and on. The one toughest industry in which to find competent employees would definitely be Construction. Construction has the highest liability. The insurance rates are beyond ridiculous, and the funny thing is (well actually it’s pathetic), those same people gauging the construction industry can’t hang a shelf for the life of them, and then complain that it shouldn’t cost $6,500 for a new roof. In California alone, Roofing Workers Compensation is $95 per every $100 an employee earns. If your roofer’s paycheck at the end of the week was $990, the Workers Comp bill on just that guy is $940.50. So in reality, thanks to frivolous lawsuits, insurance agencies getting rich for nothing and padding the premiums by 300%, that contractor’s costs into the roofing job before materials has 218
already reached $1,930.50. These are the small businesses that are hurt so bad, the ones that try their best to make the jobs run, employees happy and pray to God that they turn at least a 7% profit by the end of the job, if they’re lucky. If there is no other way around having an employee, and it is less of a burden for your business, I’ll say it until I’m blue in the face! Get a payroll service! I will give you some good reasons why you should not do payroll by yourself. 1.)
The time you will save in processing payroll is priceless when you’re selfemployed. (I sound like a MasterCard commercial! No kickbacks here either).
Payroll tax laws change constantly. If you made a payroll tax error, the IRS and State will hold you 100% accountable.
Payroll Services offer Direct Deposit to the employee’s checking or savings account. Your bank would charge you a minimum fee, usually around $5 for each transaction.
Payroll Services file all of your tax returns and tax payments: State, Federal, Year End W-2’s, they even do 1099’s (sub-contracted labor).
A lot of small businesses feel that if they process the payroll themselves they’re saving a lot of money by not paying a payroll service. But the question is, how much money are you actually saving? Let’s say Joe wants to hire an employee because he just landed a big Web design account. He’s trying to figure out if he should process the payroll on QuickBooks® or use a payroll service. If Joe did payroll in house and used QuickBooks®, he would have to pay $169 for the annual tax table update service. Face it, nothing is free, and those nice folks up at Intuit® work really hard making sure there aren’t any bugs in the software or tax tables. They have to absorb the costs somehow. Then Joe’s new employee Scott wants Direct Deposit, and because he gets paid weekly, the bank is going to charge Joe a weekly Direct Deposit fee of $5. Then 219
because Joe has to figure out how to do Payroll and process it once a week, it will take him at least 30 minutes to run Scott’s payroll, because there are weekly tax deposits due to the IRS and State. Then Joe has to make a special trip to the bank to make an IRS tax deposit because you can’t mail that one in. So in figuring what it will cost Joe to process his own payroll, this is my conclusion.
Along with the amount of headache saved plus the unseen payroll costs, remember that the Payroll Service option alleviates you from another job. But you need to know how to do Payroll just in case. If you don’t have a clue how to even post Payroll when it comes in from the Payroll Service, your books will be a mess.
So here goes the lesson in Payroll. From your QuickBooks® top menu, select Edit, Preferences. Depending on when you set up QuickBooks®, you might not have selected Payroll. This is where you can change that. If you think you set it up originally, go in and check it out anyway 220
so you can see what yours looks like. If it’s not selected, click on the Full Payroll Features button. This will initiate Payroll into your QuickBooks® working file.
Edit, Preferences. Scroll down to Payroll.
Select Full Payroll Features.
Click okay to save your changes. Now here is the not-so-fun part. QuickBooks® now requires you to go online and pre-register your payroll so that you can get the current tax table updates. They will require a credit card number, and they will also give you the option to sign up for QuickBooks’® payroll service which is competitively priced with other payroll services out there. From your QuickBooks® top menu, select Employees, Add/Change Payroll Service.
Employees menu, click on Add/ Change payroll service
Select choose a payroll option and click Continue.
Choose a Payroll option.
Select the Basic Do-It-Yourself Payroll (if that is the one you choose) and click Continue. You will be asked to enter in your company information.
Select a Payroll Option, Basic, or do you want them to do it for you?
The company information screen is where QuickBooks’® payroll service will recognize your company for online updates. If your taxpayer ID number is different in the future, their computer won’t recognize yours. If you have to use your own Social Security number and not a Federal Taxpayer ID number, you will need to keep using the same number with the version of QuickBooks® that you purchased.
QuickBooks® is going to prompt you to sign up for the Basic Payroll. Everybody thinks basic payroll is just the tax tables; it is not. It is their basic payroll service that they provide for clients. If you notice on the top row, it says “As soon as you go online to complete your sign-up the basic payroll subscription will begin. (Or if you choose, you will receive one free payroll tax table update.) If you want the tax table, you have no choice but to continue their process to get it.
This is what their fees are for the Basic Do-It-Yourself Payroll. The annual fee is now $169 just for the subscription. QuickBooks® will then verify company information. Unfortunately to show you these steps, my company information instead of Joe’s has to be used here. It’s all in a day’s work. “Day” – what am I talking about, look at the clock on the next picture, it’s 9:08 pm! The next screen is for the payroll administrator. This is the main person who owns the computer software, and the one person to whom Intuit® will release information unless you add someone else to your account.
You will then be brought to the Payment information screen. Keep in mind if you are still using the Trial Software, you cannot sign up to receive your free payroll tax table because you need the original software. You don’t have to sign up for QuickBooks’® payroll service and pay their $169 annual subscription fee, plus the $75 one-time setup fee. Instead, if you click on the text that says “Do I have to Sign up,” it will bring you to the instruction screen on how to obtain your one-time free tax table. Just choose the online option for Do-It-Yourself, but don't enter your credit card number. You will receive one free payroll tax table update.
QuickBooks’® web server will automatically download the tax table to your computer’s hard drive.
Now that you should have your tax table ready to go, you still need to complete the setup for your payroll taxes. (And I bet you thought it was already done. Still think you want to do it yourself?) Most likely, you wouldn’t have been taken out of the payroll setup screen. I can either show you the QuickBooks® way to set up your payroll, or the Joe Standard way. I believe the easiest way to finish setting up your payroll without going through the miles of templates would be from the List menu.
I want you to go to your top menu and click on Lists, Payroll.
Payroll Item List. Includes Taxes, Wages, etc.
It will ask you if you want help setting up the payroll; select No. I have faith that you can do it. It’s no different than setting up your Chart of Accounts. Your next screen is going to look like this.
Select Payroll Item to set up a new account.
QuickBooks® automatically set up these few accounts. They are only Tax-related. We need to set up the earnings portion. Remember how to set up a new Chart of Accounts name? You
could either press the CTRL N shortcut keys, or click on Payroll Item. I want you follow the instructions just as we did before and create these accounts. Select Custom Set-Up. Select Wages, (Hourly, Salary), and click Next.
Click on Salary, Regular Pay, Next. Type in Salary in the description field, and click Next. Here is where you need to make sure you’re posting it to the correct double-entry bookkeeping account. You are expensing your payroll wages, but is it part of productivity or office? Productivity is your Cost of Goods. Generally a Cost of Goods employee would be on hourly pay, so we’ll set up the Salary first, which will go to our overhead. QuickBooks® only has a Payroll Expense account and this is wrong because we want to track the wages and taxes
separately. We don’t want it all thrown into a messy yellow folder not broken down. You’re going to have to create a few new Chart of Accounts names, using this screen. Type over the highlighted name. QuickBooks® will tell you it’s not on the Account List. Select Set-Up.
Type over this name to read Office Salaries
This is what your setup screen will look like. Click OK to record your new account. Name should be Office Salaries. It is a Sub-Account of Payroll Expenses
Select Expense Type
It will bring you back to your Payroll Set-Up screen with the new account in it, and it should look like this.
Your salary is now on your payroll item list. Let’s do the same steps for the following account names. Select Custom Set-Up, and this time select Hourly Wages, from Regular Pay. Type in Hourly Wages in the Description column. This time in Joe’s case the expense account is going to be a Cost of Goods Account. I already had Gross Labor set up for Joe so his looks like this. If your Cost of Goods Labor Account isn’t set up, like the one we did above, just type in the Account name, and set it up from this screen. If you’re in an industry where you want it broken down by specific category so you can track your workers compensation, call a payroll service to do your payroll. You’re just going to get frustrated because the process to set it up is so long that you can hopefully now see why I charge you so much.
If you need to set up overtime, follow the same steps as above; still select Wages, Hourly, and regular, but on the Description line type in Overtime. The expense account will either be Cost of Goods Labor, or your Payroll Expense, depending on whom you’re paying it to. Your payroll item list should now have all of the types of wages set up along with the taxes and look like this.
We need to correct the expense accounts for these.
Your new salary, hourly and overtime accounts.
Okay, now you need to correct the expense account for your payroll taxes because QuickBooks® has it going directly into your Payroll Expense, and remember, we created a sub-account for payroll expenses (Office Salary), so it’s not going to separate the taxes by itself. Double-click on the Federal Unemployment. You will see a screen that shows a double-entry bookkeeping.
Go ahead and Leave the Payroll Liabilities, but change the Payroll Expenses
Change Payroll Expenses to Payroll Taxes (sub-account of Payroll Expenses)
You need to add a new Chart of Accounts name as we did above for Salary, but this time, in the Payroll Expense box, type in Payroll Taxes. You will again be prompted to set it up. Make sure your type is an expense account, and you are clicking on Sub-Account, Payroll Expenses. Click OK to save.
Create a new account for Payroll Taxes.
It’s a sub-account of Payroll Expenses.
Now that your Payroll Tax Account is set up, you can go into the rest of the Payroll Tax Accounts on your Payroll list and change the Expense Accounts from Payroll Expense to Payroll Taxes. It will look like this.
Payroll Taxes are a sub-account of Payroll Expenses to separate the costs.
Make sure you change your Social Security, Medicare, Federal Unemployment, State Unemployment and State Disability Insurance. The payroll items for Federal Withholding and State Withholidng are a liability and do not get expensed, so you can leave those two accounts the way they are. Now that your payroll is set up, you need to add your employees. From the top menu, select Lists, Employees. From this template you can add your employees. Make sure you have a W-4 form filled out on each employee. A W-4 is an IRS form that the employee fills out to tell you how much their paycheck should be taxed. You can obtain a pdf version online at the IRS.gov website, or in the CD supplied with this book. Joe’s employee Scott earns $12 per hour and has four dependents. Here is how we set him up. Make sure you put his correct Social Security number and address in the employee template, otherwise his paycheck stub and W-2 will be incorrect. This is the first template of Scott’s Information. For the Overtime, the law is it’s time and a half. Scott is going to be paid weekly, so I selected that box. It will effect how your taxes are calculated!
Next click on the Taxes icon. Joe doesn’t qualify for the advanced earned income credit. His filing status according to his W-4 form is Married 4, so I selected that on my template.
Joe is in California so I select that for the State on the next template. Once again I select Married 4 as his deductions. Mark all of the State required taxes (each template will be different depending on the state that you live in). Click OK to record your changes. Joe decided that he was going to pay Scott one week’s vacation per year and three sick days per year. To figure out what your accured vacation time would be, you must figure it out based on how often you are going to pay your employees. Is it once a week, every other week, the 15th and 30th, or once a month? For Weekly payroll you would take the number of hours that you are willing to pay your employee (for Scott one week is 40 hours) and divide it by the number of weeks in a year which is 52. The accrued time for Scott would be .77 minutes. (40/52=.77) QuickBooks® will automatically convert it into military time which is .46. If you pay every other week you would divide it by 26 weeks. 40/26 = 1.54. The amount of vacation time is the same, 40 hours, funny how you take .77 x 2 = 1.54, which is equal to the every other week (2 week) pay period. For Semi-Monthly payroll (which is usually the 15th and 31st) you would divide the number of weeks by 24 because you are only paying two times per month, and as we all know, some months have an extra week in them.
This is what Scott’s looks like. Click OK, then click it again on the next template to record your new employee.
You don’t have to offer vacation or sick time, as it is an employee benefit. Check with your State on laws and regulations requiring employee benefits. Now we can finally pay Joe’s new employee. If you’re wondering, the reason why I did not have you set up the payroll initially in Chapter 2, in layman’s terms, is that it would have been a bit much, and honestly, if you are going to have employees, hopefully you’ll get so sick of this chapter that you’ll call a Payroll Service . . . because you’re not done yet.
9 Paying Employees: From the QuickBooks® top menu select Employees, Pay Employees. It will bring up a screen that says “Select Employees to Pay.” Joe sure broke the bank with the new guy. If you have more than one employee, you’re probably not done setting them up, so we’ll wait . . . Okay, we’re done waiting.
Select Pay Employees.
You can select one or select all employees to pay by clicking on the left arrow next to the names. If you notice, QuickBooks® has automatically selected the “general” bank account to pay the payroll funds from.
Bank account Check date and payroll period end date.
Make sure you are deducting it from the correct account. Next, make sure you are selecting the correct payroll date and pay period. If you pay once a week, yet you are in arrears one week, say the pay week ends on every Sunday, and you cut payroll checks on every Friday, the payroll end date for Scott is the 7th of September, and the check date will be Friday the 12th. The reason this is so important is that if the paycheck date is past the end of a Quarter (remember the Quarters: Jan–Mar, Apr–June, July–Sept, Oct–Dec), then that check would be part of the next
Quarter. I’ll give you an example. If you had a payroll week ending on December 28th, and you didn’t pay the employees until the check date of January 2nd, those earned wages will be recorded on your following Year payroll tax returns and a new Quarter. Click on Create and it will bring you into a template that looks like this.
Scott only had 40 hours and no overtime, I’m a miser…
These are the Company Tax Liability figures, and are automatically calculated.
Your accrued vacation and sick time is calculated on each check.
To track time or bill to customers, type customer’s name here.
If you track jobs or time so you can estimate your jobs better, you can enter the customer’s or client’s name next to the amount of time it took the employee to perform that function. Follow the same process with each employee, and click Create to record the check. Once all the checks are created, it will bring you back to your Select Employees to Pay screen. You can click on the icon that says “Print paychecks.” Once again it will give you the option to choose which checking account to write them out of. Hopefully you took my advice and ordered computerized checks so you don’t have to hand-write these. Select all the paychecks to print and click OK. Make sure you have checks in your printer. If you made a mistake, you can go back into the check and correct it, and you can print them again. If you are still hand-writing checks, from the top menu, select Print Forms, Paystubs. You should still give your employees a paystub even though it will be a QuickBooks®-generated stub. It will still show your employee what you paid them and how much their taxes were.
This is what a paystub from QuickBooks® looks like.
I’ll add this now instead of waiting for the Stupid Questions section. You selected Print Paystubs, and there isn’t anything there on the screen. You need to change the date range. The date of Scott’s check was Sept 12th, and because in my world it’s only the 5th, QuickBooks® automtically goes to the actual day. You need to change the date if necessary to find what you need. After you pay your employees, it is very important that you run the following reports and create a three-ring payroll binder. Make a new binder for each year. Put four dividers in it, one for each Quarter, so that your reports are clean, and easy to find. From the QuickBooks® top menu, select Reports, Memorized Reports, Employees, Payroll Summary.
You need to change the date range for the payroll period. It will show all the employees that you paid, the taxes that were deducted, and the taxes that are the company’s portion to pay. It will look like this. If you have more than one employee, it will obviously be bigger.
Breakdown by employee for earnings and withholdings.
Next you need to run the Payroll Liability report. This report tells you what you have to pay to the IRS and the State Employment Department. Depending on how large your payroll is, you need to check with your State and the IRS to find out when your scheduled tax payments are due. Your Payroll Liabilities for the payroll from Sept 1st to Sept 12th.
If it’s like Joe, the IRS would approve him for a monthly payroll tax payment. These payroll reports would go in my binder under the Third Quarter (July–Sept) payroll. When you’re paying your Payroll Tax Liabilities, from the QuickBooks® top menu, select Employees, Pay Payroll Liabilities.
Your date range depends on when you’re required to pay the payroll taxes. Joe is going to pay his weekly so he doesn’t owe anybody anything. He inputs the date range of Sept 01 to Sept 12 (the date of the paychecks). It will show all of his payroll taxes due. We select all to pay. Click Create to record.
Make sure you mark To be printed, unless hand writing.
Who the checks are payable to.
If you just go into your QuickBooks® checking account and type in the amount due, you’re not going to track your liablities. You have to go through this process or you’re going to mess up your books. To print out the checks, from the top menu select File, Print Forms, Print Checks. After you print out your checks, you must fill out the tax coupon booklets supplied to you by the Internal Revenue Service and the State.
Joe’s two computer-generated checks should show the liability tax amount, and have the total tax payment amount as stated on the previous page. In filling out your coupon book, I will show you a sample from the IRS’s one Johnny each Tax Coupon. Make sure the amount you are paying equals the tax payment coupon, or you will succeed in confusing the IRS and State.
Joe shades in with Pencil his 941 (that is the payroll tax type, and the third Quarter because it’s a September payroll). Joe writes in $92.04 for the total payment.
MAKE A PHOTOCOPY of each check and each coupon. Staple the coupon with the correct check copy, and put it in your 3-ring binder. If you do not have a copy of these coupons, you have absolutely no proof of what you paid. After every payroll, make sure you do the following. 1.) Print out an Employee Summary Report. 2.) Print out a Payroll Tax Liability Report. 3.) Pay your payroll taxes through the “Pay Payroll Liabilities” menu. 4.) Fill out your Tax Coupons for Federal and State. 5.) Make a photo copy of Tax Coupons and checks. 6.) File in your 3-ring binder. 7.) Mail your State payment. 8.) Go to the bank and deposit your Federal payment. Quarterly and Year End Payroll Taxes The IRS will send you a 941 packet in the mail a few weeks before the end of a quarter. A 941 is a quarterly payroll tax form. It is due at the end of each quarter. It tells the IRS how much your business paid to employees, how much it withheld for the employee taxes, and how much it owes for company taxes. QuickBooks® will calculate and print out your Quarterly 941 Forms, however it does not yet print out your State Payroll Tax Returns. Your State will mail you their Quarterly Payroll Tax return to be completed and mailed no later than 30 days after the quarter ended – the same time frame as your Federal. If you’re in the first Quarter of the year (Jan–Mar), your payroll tax return is due by April 30th. Since Joe hired Scott, and it is now the end of the third Quarter (July–Sept), Joe has to prepare his Quarterly Payroll Tax Returns. Oh fun. . . . It’s going to be about this time that you wished you hired a payroll service. It’s not too late, they do rush jobs too. From the QuickBooks® top menu, select Employee, Process Payroll Forms. There will be three different choices for you to click on, the first being the 941 Form, the second the 940 Form, and third the W-2. The 941 is the Quarterly Tax Return, the 940 is the 241
Year End Tax Return, and the W-2 is the thing that you will never get again because you don’t want to work for anyone else but yourself! The first step in completing your Quarterly Payroll Tax Returns is printing out your Quarterly Payroll Summary Report from QuickBooks®. From the top menu, select Reports, Employees & Payroll, Summary.
Your Payroll Summary Report
Make sure your report date is for the Quarter you are processing.
These are the taxes you withheld from your employees’ checks.
If you have more than one employee, the report would reflect each Employee’s earnings for the Quarter.
These are the taxes that you had to match and pay for all your employees.
Once you have your handy report in hand you can go into QuickBooks® and process the Quarterly Federal Payroll Tax Return. Due to the fact that there are so many different regulations for so many different states, I cannot explain each state separately in layman’s terms. You will have to contact your State Government Office to obtain the correct payroll forms. Most States have the forms available online where you can download them in Adobe pdf format. To process Joe’s 941 3rd Quarter Payroll Tax Return, from the QuickBooks® top menu, select Employees, Process Payroll Forms.
Click on Process Payroll Forms.
This is the one you want.
With the 941 and Schedule B, you will then be prompted with questions from QuickBooks® on the following templates. Follow the instructions by answering the questions to the best of your ability. Enter in the number of employees that you are currently paying. That doesn’t include sub-contractors; remember, those are 1099’s. QuickBooks® will enable you to make adjustments to your payroll tax return if there are mistakes on it. Make sure you have the correct information in front of you and that it matches the data QuickBooks® has loaded on the 941 Tax Return.
Click on your State (sane I hope…) Enter the Quarter that just ended. Click Next.
Joe just had 1 employee; enter that amount here and click Next.
QuickBooks’® payroll calculates these amounts, and should match your summary report. Click next unless they are wrong.
Don’t click this box unless you are no longer paying employees. Click Next.
These amounts should equal your payroll summary report; if they don’t, you can make corrections by clicking Yes.
If you missed a payroll tax payment, or posted it incorrectly, QuickBooks® will show it here.
The next template shows the balance due, if any, to the IRS. On Joe’s return, he made all of his payroll tax payments and has no balance due. If you have paid your payroll tax liability, but didn’t do it the way I told you, through the Pay Payroll Tax Liability menu in QuickBook®, yet you just wrote a check directly out of your checking account, QuickBooks® will not be able to track it for your Quarterly or Annual Tax Returns. If this is the case, and you can’t go back and fix it, you can plug the numbers in directly on this template.
Click Yes to change your tax payment amounts.
Enter the correct tax deposit amount here. Remember it’s only Federal, not State.
The template for Joe shows payments of $259.32 because there were tax payments made using the Pay Payroll Tax Liabilities in QuickBooks®. If you show a balance in this box that does not equal the amount of payments, you cannot just type in the amount of payments that you made. It will add together the beginning balance that it is already showing, and give you a correct total. If Joe’s tax payments for the Quarter were actually $465.85, we would enter in $206.53 ($465.85 $259.32 = $206.53) to come up with the correct total for tax payments. If your QuickBooks® calculated value deposit was $0.00, then you would type in the entire amount of $465.85. The following template will show the adjustment if the tax liability was $465.85.
Total Tax payments made. Click Next to continue.
Joe is a monthly depositor because his payroll is so low.
The next template adds the total monthly liability so the IRS can evaluate whether or not you should be a weekly tax depositer, semi-monthly or monthly.
Since Joe’s company is new, his only payroll was in September for this Quarter.
Print your 941 Form.
Make sure you print two copies of your tax forms. One for your records, and one for the IRS and State. If you don’t have a copy, your records will be incomplete, and I guarantee you will need them at some point in time. The following page is a copy of Joe’s 3rd Quarter 941 Form.
Compare the Total Wages Reported to your Payroll Summary Reports.
Make sure your total payments to the IRS Equal the Total Tax Liability, or you will be penalized for underpayment of taxes.
Your Quarterly State Tax Returns are due the same time your federal returns are due, so don’t forget to get them!
The final Payroll Tax Returns that you are required to file are your Year End 940 Tax Return, your W-2 (Employee Wages) and W-3, Employer Wage Returns. This time, from your QuickBooks® top menu, select Employees, Process Payroll Tax Returns and select 940. QuickBooks® will then take you though a list of questions.
Verify that your Total Payroll matches your other reports.
Your FUTA tax is calculated based upon your tax table updates from Intuit®.
Depending on your State, your FUTA tax could have credits against the amount due based apon State Tax Credits. FUTA Tax is Federal Unemployment Tax, and is calculated at a percentage rate deamed appropriate by the Government. Joe’s rate is .08% of every $7,000 each employee earns. If an employee earns more than $7,000, the FUTA Tax is no longer assessed and the maximum tax is met for the year. If you overpay your taxes, you can request a refund or ask for it to be applied to your next return. You’ll always forget, and no one reminds you it’s sitting there. Ask for the money back, unless it’s a penny.
This time, Joe gets a refund, which normally doesn’t happen.
At the end of every Fiscal Year, you must finalize your payroll and run the following Federal Tax Returns. Check with your State on those requirements. 1.)
4th Quarter 941 Payroll Tax Return
Year end 940 Payroll Tax Return
Year End Employee W-2’s
Year End Company W-3 Wage Statement
It’s time to process Joe’s W-2 for Scott so he can file his taxes. W-2’s and 1099’s are due to the recipient by January 31st, so you have 31 days to get them done. To make QuickBooks®generated W-2’s, from the QuickBooks® top menu, select Employees, Process Payroll Forms.
This time select W-2, Click Ok.
Select Year W-2’s are filed for and mark all Employees. Always preview W-2 before printing.
If your W-2’s are correct, load your printer with the pre-printed W-2’s you purchased either from Intuit®, McBee or any office supply store. Click on OK. If all W-2’s are correct, QuickBooks® will allow you to print. If you are missing any taxpayer ID numbers, addresses, or other information, QuickBooks® will flag you and not allow you to print until they are corrected. Click on the Print W-2s button to print your forms.
After you print your W-2’s, select Print W-3 and load it into the printer.
Here is the tricky part in completing your W-3 Transmittal. Just like with your W-2, the original form is a “Red” form. The IRS does not allow a black and white copy of these tax forms.
When you purchase your W-2 Packets from any office supply store, your packet only includes one W-3 Transmittal. So if you make a mistake you can’t white it out, and you can’t make a photocopy of it and use the photocopy to send to the IRS. Before you send any final tax return to the IRS or State, double-check your numbers to try to avoid sending in incorrect totals. The easiest way to do this is to grab your Payroll binder, and take out each Quarter’s 941 Payroll Tax return. Add each item of gross income, payroll taxes withheld and payroll taxes paid from each 941 form. You should only have 4 for an entire year. Your gross income should match the gross income reported on your W-3; the FICA and Medicare total should match your W-3. Then compare the year-to-date totals to your State Payroll Tax Return and make sure you are filing the same amount of payroll for Federal and State. If you make a mistake on your W-3 Form, you can order more from the IRS’s website. Their delivery time is about 7 to 15 days, so order in advance. File all of your payroll tax payments, reports and tax returns in the corresponding year’s 3-ring binder. If you are ever involved in an audit, the records will be at your fingertips. By now, I imagine you can’t stand payroll. It is very time consuming, but the lesson is not over yet. If you have done the smart thing and hired a payroll service, you need to know how to enter in the checks that you receive from them for your employees. This is the easy part. It’s no different than taking your handwritten checkbook and entering in the checks into QuickBooks®.
9 Entering Payroll from a Payroll Service – Your payroll service company is going to provide you with payroll reports and tax liability reports not much different from the ones that we reviewed from QuickBooks®. Because you are not going to buy the Tax Table Update, you won’t be using that feature of QuickBooks®. What you will end up doing is entering each employee’s check into your QuickBooks® checking account without going to Pay Employees. This does limit the access of reports per employees, but you will get
those reports from your payroll service. There are two important steps in entering in your Payroll from a service company. The first is entering in the Employee Payroll Checks the correct way. The second is not to forget to enter the tax liability check as well. Payroll Service companies immediately deduct the payroll taxes from your checking account. There is no reason why they should front that liability for you, but the most common mistake my clients make is forgetting to enter in that deduction. When you receive your payroll package, whether it’s weekly, bi-weekly or monthly, you need to immediately sit down and enter it into QuickBooks® so your checking account doesn’t accidentally go overdrawn. This happens way too often. If you use the QuickBooks® payroll service, they conveniently post all of the payroll taxes and employee checks to your QuickBooks® file because it’s all done online. It’s actually quite convenient and easy. To enter in your employee checks, pull up your Check template by clicking CTRL W to write checks, or from the top menu select Banking, Write Checks. Take your payroll summary report showing each employee’s check and start entering it into as if you wrote the check. Joe’s payroll Summary Report would look like this.
If you have more than one employee, enter each one separately. From this payroll summary, I enter Scott’s check into Joe’s checking account, and it will look like this.
Net Check Amount. $480 – 54.04 = $425.96
Enter the total gross wages to the correct wage expense account.
Scott’s check is entered directly into the checking account.
Payroll liabilities are a negative number because our net check is Gross Wages minus taxes.
When entering in your Payroll checks, you need to enter the Gross Wages to your correct expense account to show total wages; then you would reduce the Gross Wages by entering the Payroll Liabilities as a negative number. Post your payroll liabilities to your Payroll Liabilities account as shown above, not to your Payroll Expense: Tax account. Once you have entered in your Gross Wages and deducted your payroll liabilities, your Net Check Amount should equal the Net Check Amount that the employee received. Now your balance sheet will show a Payroll Tax Liability that needs to be paid. The reason why I make you do it this way is because if you see that Payroll Tax Liability sitting on your Balance Sheet saying “pay me,” then you will be less likely to forget to enter in the Automatic Payroll Tax payment that your payroll service
Joe’s New Payroll Tax Liability.
makes to your account. The next step is to Enter in the Payroll Tax Payment from your Payroll Service Companies Liability Report. Their report might look a little something like this.
According to our payroll reports from the Payroll Service, this is the amount we are deducting from our Checking Account, $111.16. To enter this automatic deduction into QuickBooks® our entry would be written as a check once again, and would look like this. After I recorded my Payroll Tax Payment, my Liability account should now be zero.
The only reason why I use Paychex is because of Dawn Brown!
Employee portion of the payroll tax go straight to Payroll Liabilities
Enter the Total amount deducted from the payroll service.
Company portion of payroll taxes go straight to the Payroll Tax expense account.
See, no more liability.
The other reason you need to post your Payroll Tax payment this way when you are using a payroll service is that when you pay an employee and withhold money such as Federal and State Taxes from their check, it is now your liability to pay that to the correct tax agency. You are now also obligated to pay the Company’s portion of FICA, Medicare and Unemployment insurance that you signed up for when you hired someone. That is an Expense. So when you’re looking at your Payroll Tax payment and wonder why one portion goes to your Liability account and the other goes to your Payroll Tax Expense account, this is why. If you have balances in your Payroll Liability account and can’t figure out why because you know the payroll service company took their money from you, you most likely entered a payment or a payroll check in without posting it to the correct account. Try to find the incorrect entry and fix it. If all else fails, enter in a dummy check from your Payroll Tax Liability account and send it on over to Payroll Tax Expenses. At the end of the year when you have your tax preparer look at your QuickBooks® data, they should reconcile your Payroll Expense accounts against your payroll tax returns that were filed and make any adjustments necessary. As long as it’s not an enormous amount and you haven’t been forgetting to pay your payroll taxes, there is no other reason besides incorrect posting to have a balance left over in the account.
Now isn’t this much easier than processing payroll? This is what an adjusting entry looks like.
Joe said forget it, and posted it straight to Payroll Taxes to let his accountant deal with it.
Joe had a balance left of $37.00 and can’t find where it’s off.
His Liability is $0.00, which he already knew because the payroll service took it from him.
If you have made it through this chapter without throwing your computer in the parking lot, I am very proud of you. Payroll is another job all in itself, and does take up quite a bit of time for a small business owner. If you have a bookkeeper who comes in and processes your paper and they know what they’re doing, keep it in house. If not, it might be less stressful just to hire a payroll service to handle it all for you. The same goes for the next portion of this chapter, because they do 1099’s too.
9 1099 Miscellaneous Income (Sub-Contracted Employees) 1099’s are the IRS’s way of keeping track of income for “General Contractors,” “Consultants,” and independent workers. The purpose for these tax forms is to keep the independent contractors income-traced so they can’t hide their earnings from the IRS. 1099’s are only processed on “Sole Proprietors,” self-employed individuals earning a living in a “service” field. There is a maximum earning amount they have to receive from one company to qualify to receive a 1099. That amount is still currently $600 per year. If you have paid an Independent Consultant or 257
Contracted worker more than $600 in a fiscal year, you are required to file the IRS Form 1099 and 1096 at the same time Employee’s W-2’s are due: no later than January 31st of any given fiscal year. A Corporation, or a LLC does not receive a 1099 miscellaneous income form. When you are paying your bills and writing checks every month, whether it is manually or in QuickBooks®, you always need to record and keep track of all independent contractors. Even if they receive a check for $300, which is below the limit, you still need to send them a W-9 Form (a pdf version of this file is located on the CD, or you can download it online at www.irs.gov). You are legally not supposed to release payment to any contractor until that form is received with all of the proper information filled in. If the contractor refuses to fill out the W-9 form, then you are required by Federal regulations to withhold 31% from their payment and submit it to the IRS for Federal Taxes. The penalty for continuing to pay a contractor without filing their Tax ID number to the IRS is up to $100,000, and I really don’t think you would be thrilled about paying that. Also, for some states such as California, you must fill out a new contractor’s hire form and submit it to the Employment Development Department within 30 days of hiring new contractors; the same rule applies for employees. This is so they can track and find delinquent child support evaders. If you keep track of the contractor’s W-9’s throughout the year, then you won’t be rushing to obtain the information before the IRS due date for filing. You can order any form or publication you may need online; it usually takes 7 to 15 days to receive your forms. Make sure you order enough in case of errors. The IRS does not supply computer-generated forms. If you want to be able to process them through QuickBooks Pro®, which I highly recommend, then go to your local office supply store, or McBee Bookkeeping Systems, and order computer-generated 1099’s. It is much easier and less time consuming to run them from your accounting software then to type them in. However, when you purchase a package of 1099’s from an office supply store, they only have one (1) Form 1096, which is the annual tax summary that is the attachment form for the 1099’s you are submitting. 258
Just the same as a W-3 Form, a photocopy of this form is not acceptable to the IRS, it has to be an original (one of the few they don’t accept under the Paperwork Reduction Act). If you make a mistake on the original, you can’t white it out and try again. QuickBooks’® older versions won’t, however, print the 1096 form. That one you do have to hand-write or type in, unless you are using a newer version of QuickBooks®, such as 2004. Keep a file folder containing all documentation (W-9’s) and the copy of the 1099 and 1096 tax return filed to the IRS for that fiscal year, the same as you would with your payroll binder. In QuickBooks® you will need to set up your preferences to be able to process 1099’s; it won’t do it for you because it likes you. From the top menu, select Edit, and scroll down to Preferences. This is where you can change your personal or business preferences within the QuickBooks® data file. By the way, I get tired of doing the ®, but legally I’m supposed to. . . .
It’s the one that you’ll always forget where it’s at.
On the left-hand side of the template are icons for the preferences you will be allowed to modify. Scroll down until you see the Tax:1099 Icon and double click on it.
Select the rent account only if you lease space, and not to yourself… Tax:1099
Notice how on Joe’s 1099 template all of his accounts say “none” in the account column. That’s because we need to go in and manually add the accounts that would be considered a 1099 contractor. If you’re a home-based business, you can’t write off your rent; it’s deducted on your Schedule C income tax return as Business use of your home. If you rent building space from a landlord, you need to set up the rental account so that you can track the 1099 recipient. Under the account column for rent, since it is only one account to track here, just type in Rent. It will bring up your Chart of Accounts for rent. Next scroll down to “Non” Employee Compensation, which is number 7. Click on Selected Accounts so you can mark more than one.
Non-Employee Compensation These are your Chart of Accounts.
Click on the arrow key under the Account Column. When you click on the Selected Accounts name it will allow you to select more than one account. You will then be able to scroll through and select the accounts you want to include so QuickBooks® can track your 1099’s. The only accounts on Joe’s business that qualified were Professional Fees: Accounting and Legal, then Computer Repairs and Maintenance. They are all 100% service oriented and should be 1099’d if they’re not a corporation. Your instances may be different. If you hire sub-contractors to work on jobsites, they would receive a 1099. There is a very fine line with what is acceptable nowadays. States are cracking down on contracted income. They are trying to take every penny the small business owner earns, and turn every sub-contracted accountant, bookkeeper, outside sales rep, and broker into an Employee so that they can collect additional payroll taxes. It is ridiculous, but they can do it. They don’t go after the contracted individual for payment; they go after you. So just make sure you have your paper in order. Also keep in mind that if you hire someone to come into your office and sit at your desk, use your tools, and stay during “your” requested hours, this legally (with legitimate cause) is not a contractor. They are an employee, no matter how you try and rationalize it. If you attempt to pay them contractor terms, it could be a very ugly costly mistake. Make sure they have their own business license and their own office. If they have to do some work at your office, that’s perfectly fine, but when you start ruling their hours, they’re no longer “free” to come and go as an independent contractor. When selecting the Non-Employee Compensation on Line 7, just mark off the following accounts: 1.) Professional Fees: Accounting, Legal, Consulting 2.) Repairs and Maintenance: Building, Computer 3.) Cost of Goods: Sub-Contracted Labor 4.) Advertising: Graphic Design 5.) Commission (if you hire outside sales reps) 261
If you are not sure whether or not someone you pay money to should receive a 1099, ask yourself a few questions. 1.) Are they a Corporation? If Yes, then NO 1099 2.) Did you pay them more than $600? If Yes, then YES 1099 3.) Did you buy a product from them, like at Home Depot®? If Yes, then NO 1099 4.) Did they provide you a service (e.g., Landscaping, Repairs, Bookkeeping, Accounting, Legal, Loan Processing, Appraisals, Underwriting, Secretarial at their office, Construction, Printing)? If Yes, then YES 1099 After you have selected all of your Non-Employee compensation accounts, click OK to save your changes. During the year when you are receiving your W-9 Forms, you need to enter that information which is the contractor’s address and Social Security or Taxpayer ID Number into their vendor file so that QuickBooks® can track their earnings. If you don’t, when you go to file your 1099’s and ask QuickBooks® to prepare them for you, your books won’t show any contractors who need a 1099 filed.
This is what QuickBooks® is going to yell at you…
Click on your Vendor icon to pull up your Vendor list. Look through your list to see if there are any Vendors who provide a service to you.
I see three on Joe’s. Mr. Fix It, Mr. Printer, and SDBAS (me).
Double-click on the first Vendor, who is Mr. Fix It. Make sure he has current address information for the 1099 to be mailed to, and click on the Additional Info icon.
Click on this icon to add Taxpayer ID.
This box must be marked to process him for a 1099.
Fill in the Contractor’s Taxpayer ID Number and mark the Vendor as eligible for a 1099. If you do not mark this information, QuickBooks® has no way of reading your mind and including him with your 1099’s. Just because you flagged your Accounts that require a 1099, such as Repairs and Maintenance, you still need to follow through with the Vendor information. At the end of the year, you need to run a Vendor 1099 Summary Report. QuickBooks® will pull up all 263
of the Vendors which you have marked for a 1099, and the total Cash amount you have paid to those Vendors. From the QuickBooks® top menu, select Reports, Vendors, 1099 Summary.
Select 1099 Summary Report.
This report only shows you the Vendors for whom you entered their information, but what if you forgot someone? On the Report, I want you to click on the 1099 options box. You need to change your options to include All vendors, All accounts, and Ignore thresholds. This is so you can see each Vendor regardless of whether or not they need a 1099. If you missed someone, you’ll be able to see it here by looking at the total paid to the vendor and who the vendor is.
Print out your new report and start marking off each total that is under $600, because we know that is the minimum a contractor needs to earn. Then look at the name of the vendor; if it’s a corporation, mark if off, they don’t get a 1099. The uncategorized column just means that out of all the Vendors you paid in QuickBooks®, the Account you paid that to was not selected as a 1099 account when you set up your 1099 preferences; this is okay. After reviewing your list, if there are Vendors that need a 1099, you must go into their vendor account and add their Taxpayer Identification Number and mark the 1099 box in order for QuickBooks® to include it. Now you can reprint your 1099 Summary so it includes only those Vendors who require a 1099. Do this by re-selecting the 1099 Options: Include only 1099 Vendors, Only 1099 Accounts, and Use thresholds. If for some reason the Vendor that you forgot is still not showing up on this report, but you know they need a 1099, the culprit is most likely the 1099 Preferences. Run a quick report of the vendor in question. You can do this from the Vendor List screen. Highlight the vendor, and select the Report icon at the bottom of the screen. Click on Quick report. This will bring up all of the vendor’s history. Double click on the most recent payment and see what Account you expensed that check to.
Double click on this entry to view the bill. Create a Quick Report.
The Expense Account was COG: Equipment Repairs.
To make sure your Vendor is being tracked correctly, go back to Edit your 1099 Preferences and make sure that the Expense account is included with those 1099 Preferences. If it is not, you need to include it by following the same instructions on adding your 1099 Preferences. Once you have reviewed all of the Vendors and everything is correct, you can process your 1099’s. The process is very similar to the one you use for W-2’s. From your QuickBooks® top menu, select Vendors, Print 1099’s, 1096.
Select this item.
Make sure your date range is for the correct year.
Click OK after you enter the correct year you are filing the 1099’s for. Your next screen will show you each vendor and amount for the 1099’s. They should match the finalized Vendor 1099 Summary report that you printed. Select Preview 1099 so you can make sure all address and Tax ID numbers are correct. Your preview won’t show all of the boxes like the W-2 did. If everything looks correct, select Print 1099.
Mark all 1099’s to print.
QuickBooks® print preview 1099.
Make sure you put your forms in your printer. Your 1099’s will look like this. All of the information from QuickBooks® will be entered in the correct boxes on your 1099 Form.
The data from QuickBooks® 1099 will print in the boxes of your computergenerated 1099.
Once your 1099’s are printed, you can print your 1096 Transmittal Form. Click on Print 1096, load your printer with the form, and QuickBooks® will calculate the amounts and fill them in for you. Your 1096 will look like this.
This is how many 1099’s you filed for each vendor.
Add each 1099 you printed to make sure they equal this number.
This is what I mean by “no photocopies” …
This chapter gave me carpal tunnel syndrome!
Computerized Payroll is obviously not a very easy subject to teach, and breaking it down in simplistic layman’s terms is a tough job. Do yourself a favor and remove the job and mistake factor from yourself and hire someone to do it for you. Whether it’s a hole-in-the-wall bookkeeping service that offers payroll, or a bigger payroll service company, the headache that it is going to save you at the end of the year, when your employees are freaking out because they need their W-2, will save you more money in your time to process it, than it would to have you struggling to figure it out in a panting, sweating hurry. If you are a contractor who is looking to save a few bucks on your Workers Compensation package with a payroll service company who also writes workers comp policies for 5% less than the other carrier, be wary. The 5% is hidden in the “payroll taxes,” while they make you believe that you’re saving an enormous amount of money in workers comp, and that the payroll processing is pennies. It is not; just remember, your employer payroll tax liability is 7.65% (FICA and Medicare) plus the Federal and State Unemployment which maxes out based on the employee’s earnings; so if you have a sales rep who says the payroll taxes are 12 to 15%, you know that is a load of B.S. That 5% is the difference in the workers comp, and they’re not going to give it to you . . . well actually, yes they are, just not in your favor. It may be worth your while with a program like this because they promise you that you don’t have to file tax returns ever again, and you’ll never have another workers comp audit, but honestly how do you think they do this? They now have full leverage over all of your employees; your employees work for them, not you; and with the hundreds of thousands of employees they have under their umbrella with the thousands of companies they just signed on, their workers comp is down 15 to 20%, but you are still paying the same thing. You think it’s “just the payroll taxes” even though last week’s payroll was $6,500 and this week’s is $7,000; after a month of that, you’re out $2,000 and you didn’t even get kissed.
Chapter 7 Bookkeeping Reports and Record Keeping
9 Financial Reports It’s time to put all your hard work on paper in the form of financial reports. They are just a fancy name for “How much money I made, How much money I spent, How much money I have left, and How much money I’m worth.” Up until this point, all you have really done is enter data into a computer; now you need to see what the data says. There are a couple of forms on the CD that come with this book that will remind you of what is important to print out each month. Your biggest concern should be your ability to understand a Profit and Loss Statement and a Balance Sheet. They are the two main pieces of paper that will tell the story, whether good or bad, about your business. Instead of confusing you, it should give you ideas on where too cut back, spend more, drop products, or hire people. In a normal world (which I have yet to find), you would not finalize any financial reports until the month is complete. To finalize a financial report means to check it for errors, such as posting expenses to the incorrect accounts when writing checks or paying bills; to make sure all bank accounts are properly reconciled, and all credit card receipts are posted and reconciled against the statement; and checking that all customer invoicing and payments were received and made, and all vendor bills were posted or paid and payroll was completed if necessary. The last bookkeeping procedure that you completed in Chapter 5 was to reconcile your bank statements. Now you can hopefully see the reason why that was last on the list. It may seem like a lot of additional work. If you make a lot of mistakes, it is, but if your choice is to do this on
your own, you also made that choice to put aside that time to do it. The first report you need to run is your General Ledger. The reason you would run this one first is that it’s going to show you each transaction, check, invoice, deposit and payroll check that was entered into your QuickBooks® data file. It is where you will find the majority of your mistakes. Your General Ledger is your entire filing cabinet with every file you created from your Chart of Accounts. It is your Balance Sheet and your Profit and Loss Statement combined together, showing in detail each account and entry. Joe’s financial reports for September need to be finalized and printed. I know, I didn’t print any for July and August, but he was a startup and there wasn’t enough activity to show you, so I chose September. Throughout this book I have shown you little tricks here and there on printing reports, modifying your own and how to get them. You already made a General Ledger report when you entered your startup costs to make sure you didn’t leave anything out. I want you to go to your QuickBooks® top menu, and select Report, Memorized, Memorized Report List. Double-click on this report. Memorized Report List will bring up all these reports that you will use quite often.
Double-click on your General Ledger report located with the Accountant list. It is not uncommon if you have a lot of activity to have a General Ledger that is 30 pages long.
Change the date to the correct month that you are reviewing.
Your General Ledger report will total every single entry made into all of your accounts. It is taking all the double-entry bookkeeping and adding it together. Check your entries by making sure you have posted the correct information into the correct account. To do this is really easy if you think of it as filing. If you had your phone bill from Ma and Pa Bell, yet you accidentally filed it with Mr. Printer, you would take the bill out of Mr. Printer’s folder and put it in Ma and Pa Bell’s Folder. In your General Ledger you would double-click on the incorrect entry; you would notice this one as being a telephone expense yet it is “filed” under Printing and Reproduction. Pull it out of the file and move it to the telephone file expense. To re-file your mistakes, after you double-clicked on the entry, QuickBooks® will bring you back to the original entry for that transaction. Go
If the account is wrong, change it here and click Save and Close.
It’s OK to correct an item that has already cleared as long as you’re not changing the amount or deleting it.
down to “account” and change the account to the correct one. Click on save to record your changes. Once you have corrected all of your mistakes, you can go on to the next reports. 9 Balance Sheet – A Balance Sheet is just a neat piece of paper that totals how much money and assets you have, how much money you owe, how much money your company made, and how much money your company is worth. Double-click on the report that says Balance Sheet in your memorized report screen. At the end of September, Joe’s Balance Sheet looks like this.
This balance sheet includes everything to 9/30/03.
How much money Joe has…
These are “How many assets” Joe has.
This is “How much money” Joe owes.
How much money Joe took and put in.
This is “How much money” Joe made.
The most confusing part of a balance sheet is to try and figure out why the top (Assets) and the bottom (Liabilities) are the same number. If you look at your business as money coming in and money going out, the difference to balance them out would be how much money the business made. Your total Assets and your total Liabilities & Equity always need to balance out to zero. If you add Joe’s total assets of $19,552.92 and subtract his total Liabilities and Equity of $19,552.92 the balance is $0.00. If this doesn’t happen, either your QuickBooks® accounting fiscal year is incorrect, or there is a glitch in the QuickBooks® software. My bet is your accounting year is wrong. Your balance sheet shows the total of all months prior, not just the month you are printing the report for. The reason for this is to give you a grand total of your assets and your liabilities. If you look at Joe’s total Net Income for his little business, it’s going to show $7,252.83 on this current Balance Sheet, but when we run our Profit and Loss for the month of September, it’s going to show a Net Income of $9,071.05. That is because his balance sheet is taking the income or loss Joe made for each month in its current accounting year and adding
them together. Each new year your business succeeds and starts a new accounting period. That income is transferred to the new year in an account called Retained Earnings; otherwise your balance sheet would continuously add your Net Income for each month without stopping. In five years that could add up to such an enormous misconception of how much money your business made that year. Your Balance Sheet when finalized each month and printed with all of your financial reports should give you a consistent reminder of what you have and who you owe. You need to look at it as a tool, keeping your finances (whether good or bad) in order. When reviewing your Balance Sheet, you need to look at the big picture of your business. The first place I look to see if you’re in financial trouble is; are your liabilities more than your assets? If you owe more money on notes, loans, Accounts Payable and Payroll taxes than you have money in your checking account, savings account, plus your Accounts Receivable, you business is not in a good way. This is where you would take a look at your budget again, and see why your liabilities are only getting bigger. Hello Captain Obvious! There are three reasons why your liabilities will outweigh your Cash Assets. Either you’re not collecting on your overdue customer invoices efficiently enough, you’re not making enough sales, or you spend too much money. Your balance sheet will help you come to the realization of your cash situation. If you know that you don’t owe that much money, yet your balance sheet is showing a different story, then your books are not being updated properly. This could mean you haven’t paid your payroll taxes through the correct QuickBooks® process. You're posting principal payments to expense accounts rather than posting them to their liability account to lower the balance due. This is also where you can look and see, if you have a bookkeeper, whether or not he or she is doing a good
job. Look at your balance sheet and ask yourself, How much money do I have, How much money do I owe, and How much money did I make? If you can answer those questions with the paper right in front of you, and truly believe that those numbers look correct, then you are doing OK. If you can’t see how your credit cards are at $7,000 because that’s what your balance sheet says, open your credit card template in QuickBooks® and review each entry. Make sure you reconciled it against the last statement that came in the mail and see if the balances are the same. Do that for each account on your balance sheet to verify, double-check and approve of the number presented to you. You will have a bigger picture of what you have and what you don’t.
9 Profit and Loss Report – A Profit and Loss Report is a “Did I make money (profit) or did I lose money (loss)” piece of paper. It totals all of your income, subtracts your COGs (direct costs) and subtracts your Expenses to give you an overall picture of how you did. It’s your report card. Did you Get an A+, average out at a C, or did you flunk? It has the power to show you where you’re doing an awesome job, or smacks you in the face and tells you to get with the program, the ship is sinking. It’s not easy being so brutal about money and finances, but this is as truthful as it’s going to get. You don’t need sugar coating, you need honesty, and if you know what you’re looking at, you have a better chance of being a success. You need to look at your profit and loss report in detail. Where are you spending too much money? Are you charging enough for your product or service? Do you break even after your direct costs are deducted? If so, you need to raise your rates! It will also help you plan your taxes, especially if you’re paying quarterly. Enter your data into QuickBooks® correctly, and you won’t be in for bad
surprises. Joe’s Profit and Loss Report for September is pretty vague. He didn’t have a whole heck of a lot of activity, being a startup, but here’s what he has. From the Memorized Report menu, double-click on the Profit and Loss Statement located with the Accountant reports.
Joe’s accounting is Accrual, so this number includes all billed invoices.
His COGs related to $2,495.64 of his business, giving him a Gross Profit of $9,284.61
He didn’t have many expenses this month.
Joe’s net income after everything deducted is $9,071.05.
Joe’s Profit and Loss shows a clearer picture of his business finances; however, I want to know more. I’d like to see by what percentage his Cost relates to his Income. I also want to see what his business has done financially since he opened it up. I know that he has one complete quarter of business, which is the third quarter, “July through September.” I’m going to modify this report so I can see a bigger picture. From the report screen double-click on the Modify Report icon in the top left.
Click on Modify Report.
Select Display columns by Month if you want to see each month listed separately.
I have changed the date to include all months in the third quarter.
Select % of Income to show percentages on your reports.
The following page shows Joe’s Quarterly Profit and Loss report for the three months of July through September combined. Each Income and Expense item is also shown as a percentage against the gross income. This means that if Joe billed out $1,000.00 for the third quarter, and he paid $250.00 for Office Supplies, out of the $1,000.00 of income, 25% of it was paid for office supplies. When small business owners use the percentage to income reports, from my experience with clients, I feel they understand the percents better than they would with just the regular report.
His WebHosting doesn’t make much money at all.
Joe’s payroll is 11.31% of his total sales.
Joe’s Gross Profit is 78.7%. WOW! 40 to 50% is really good.
Joe has a nice Gross Profit; you’re doing well if yours is 15 to 20%
We’re worth it…
9 Accounts Receivable Aging – I actually prefer the Open Invoice report rather than the Aging report. As I mentioned in Chapter 5 during your Accounts Receivable lesson, the Open Invoice report shows in detail the invoices that you have billed out that are still due. The reason for printing this report with your monthly reports is, in case your computer crashes, you have a backup of who owes you money. It’s a nice, easy, and convenient way to remember without panicking if you can’t retrieve your data. This Open Invoice Report will be listed under the Customers section of your Memorized Report. Double-click on this report, and modify the date to the month you are working on.
Compare this number to your balance sheet Accounts Receivable Balance; they need to be the same.
Joe’s doesn’t match the Balance Sheet, so there is something wrong. Nine out of ten times, the report is pulling its data to include all open invoices. Just because you changed the date, it’s still searching for all. To fix this, select Modify Report, click on the advanced button in the bottom right-hand corner, and select “As of Report Date.” Click OK to save your changes, and QuickBooks® will bring you back to your report with all of the invoices that were due as of the date your report is dated.
Select Modify Report. Select As of Report Date.
Click OK here, and then here.
My new Open Invoice report shows a balance due as of 9/30/03 of $4,501.93, which equals my Balance Sheet report as of 9/30/03. It is now correct.
9 Accounts Payable Aging – This report for a month-end report should also be an “Unpaid Bills Detail” for the same reason as the Open Invoice Report. It will show each Vendor Invoice in detail rather than one total amount due. This is also just in case . . .
From your Memorized Report screen, under Vendors, double-click on the Unpaid Bills Detail Report. You will once again have to modify the Report so it includes all bills due as of the report date. Modify it by selecting Advanced in the Modify screen, mark the box that says As of Report Date.
This amount needs to match your balance sheet Accounts Payable Amount.
Joe’s unpaid bills match his balance sheet, so we know they are correct. Look through you Accounts Payable report and make sure that you didn’t accidentally pay a vendor bill straight from your checking account without processing it through your Pay Bills section of QuickBooks®. If you have a lot of bills on your report that you think you might have paid, before you delete them from your Bill screen, you need to double-check in your checking account to see if they were indeed paid. If you are 100% positive that there are bills showing up on your report that you have paid, and you forgot to pay them through bill-payment, double-click on the bill from the Unpaid Bills Report, and select from your top Menu, Edit, Delete Bill.
Select Delete Bill or CTRL D for the shortcut.
Before you get a wild hair and go deleting a bunch of invoices, checks, or bills, make absolutely sure that you are correct in doing so. Also, do not delete any transaction from a prior year, especially if you have already filed your tax returns. It would conflict with your balance sheet and your financial reports. That is not a good thing. 9 Sales Report – For your records and safe-keeping, you need to also print out a Sales Report if you want to see every invoice you billed out for the month. Depending on your industry, you may not need to print out this report. I feel it’s important especially if you have someone else working on your books. You need to be aware of whom you billed and for how much. Your Profit and Loss only shows you a total amount of income earned in the month, and your Open Invoice only show you the invoices that are still due. What if the other invoices or cash sales you had never made it into your bank account???? You never know. These are just checks and balances to make sure your money is still your money. That is why we’re doing this; we may enjoy what we do, but honestly, we do it for the money. From the QuickBooks® top Menu, select Reports, Sales, Sales by Customer Detail.
Sales by Customer Detail report.
I can see each invoice number billed out in September to make sure it matches all of my other reports.
This number matches my Profit and Loss report.
If you are on a Cash accounting basis you won’t necessarily need to run an Open Invoice or an Unpaid Bills report, but still run all of the following reports. These are the items that you need to put in your three-ring binder separated by month, for the entire year. You can buy the monthly divider tabs to separate the month so your reports don’t run into each other. Your best bet if you have a lot of data is to get at least a three-inch binder so it can fit everything. The following reports need to be printed on a “Monthly Basis.” 9 Balance Sheet 9 Profit and Loss Statement 9 Accounts Receivable Aging (only if accrual) 9 Accounts Payable Aging (only if accrual) 9 Monthly Sales Report 9 Monthly Payroll Reports (hopefully you hired a service! – see chapter 6) 9 General Ledger Report The following reports can be added for tax planning. 9 Profit and Loss Statement – Year to Date This report will give you a total of the entire year’s earnings or losses. I recommend including this report so you know what your total earnings are, without any surprises. To run a Year to Date Profit and Loss Report, double-click on the Profit and Loss report from the Memorized Report screen. Pull down the Date Tab, and select This Fiscal Year to Date, or enter the date manually (which would be January 01, through September 30, 2003 for Joe). QuickBooks® will pull all of the data for the entire year and create your Year to Date Earnings report.
Select this Fiscal Year to Date
Or manually enter the date in.
9 Financial Packages to Banking Entities – If your bank requires copies of your “Financial Reports,” or if you are trying to obtain Financing in one way or another, the two reports that you need to make for a bank are your Balance Sheet and Year to Date Profit and Loss. With banks, it’s all on presentation. If you supply them with financial reports that paint a bad picture for your business, you’ll never get a loan. If you don’t look that good on paper, yet you have backup documentation and explanations for items on your Balance Sheet, you have a better chance. Make sure you do your best to prepare your reports as clean as possible. You don’t want to give a bank reports that have unexplainable entries and accounts on them. If you’re trying to apply for SBA Loans through your bank, your Cash Flow Projection is going to be the key report that they will analyze and look at. Here is a list of criteria that they want to see; and unfortunately it is very difficult to get a SBA Loan, no matter how easy they say it is. 1.)
You must have some type of collateral, mainly Real Estate. The Equity in your home must be at least 50% of your requested loan on most programs.
The terms of your loan greatly affect your loan payment, which will affect your Cash Flow Forecast Report. Don’t forget to include your SBA Loan on your Cash Flow if you’re submitting it for approval.
Your business if already in existence must show income.
If you’re a Startup, you normally won’t get funding unless you have Real Estate Equity and Good Credit (unless you’re really lucky).
Your personal finances can’t be maxed out – meaning, you can’t owe a lot to creditors; you need to be able to afford to pay them back.
If your business is in dire need of financing to survive, remember that the first three banks that you go to are going to turn you down; it’s that fourth bank that will most likely say yes. Don’t give up, and if all else fails, call in a professional to put together a Financial Business Plan.
9 Year End Accounting I have enclosed a Year End Checklist in the Forms portion of this instruction manual to help guide you through processing year-end books. Year End Accounting is really the nightmare time of year for tax professionals. Unless you are going to try and wing it and do your own tax returns, the only thing you really need to worry about is making sure everything is posted and reconciled. Your Tax Preparer or CPA will do the rest. We love you more when you take it upon yourself to: 9 Make sure all checking accounts are reconciled 9 Reconcile your Accounts Receivable and Accounts Payable. Make sure all invoicing and bills are posted (especially if you’re on an accrual basis)
9 Post all business-related cash receipts. 9 If you have loans on your balance sheet, get the Bank or Lending Institution to send you a year-end report with the balance to make sure they match. 9 Prepare and File 1099’s. (Hopefully throughout the year you have collected the W-9 information on the contractors. If you have not, they need to be finalized and postmarked to the contractor no later than January 31st. The reports are due to the IRS by February 15th.) 9 Supply us with your year-end Payroll Reports! If you have a payroll service that handles the payroll, give us a copy! 9 Most CPA firms use QuickBooks Pro® as well. The majority of their clients are set up on QuickBooks Pro®. This is a list of the following information that a CPA firm will require from you to prepare your tax returns. I have included instructions for making the backup in Chapter 8. 9 Back Up Disk *Accountants Copy* from QuickBooks Pro® 9 Hard copy of the following reports: 9 Balance Sheet 9 Year to Date Profit and Loss 9 YTD Payroll Tax Reports 9 Mortgage Interest 9 Medical Expenses 9 Donations
9 Creating Your Real Yellow File Folders These folders will be your actual physical file folders, and they will match the contents of what you entered into your QuickBooks® Chart of Account files. So in actuality you are making the true yellow files that tell the financial story about your Chart of Accounts. Always, always, always separate your files by year. In January of each year, after all of your receipts, bills, and invoices are filed in their correct folder, start new file folders for the new year. It makes everything so much cleaner and easier to find, especially for tax returns and audits. It is very important to make your files clean, meaning you don’t throw your bills, statements or junk in arbitrarily. You file in order by date, with the most recent dated transaction on the top. Wouldn’t it be nice to go look for an invoice from a customer and pull the file out of your filing cabinet with the dates in order so you don’t have to search through six hundred invoices to find one from March? When creating your files, you’re obviously going to create your standard vendor (accounts payable files) and customer files. These would be considered your Income, Cost of Goods, and Expense accounts that are listed on your Chart of Accounts. You would also keep separate file folders for you bank accounts, petty cash, deposits, and of course for all the draws you took all year. Just print out some nice and tidy labels and affix them to your yellow file folders. The best labels to buy are the Avery Number 5160 for file folders. You can always hand-write the name on the folder, but honestly, it looks messy and lazy. Have your kids who can read and type do it. I have my eight- and six-yearolds making labels and filing for me. The following folders are very important to keep clean and separate. When reconciling your bank statements, after you have printed out the reconciliation report from QuickBooks®, staple it to the back of your bank statement,
punch a couple of holes (2) in the top of it, stick it on top of the metallic fasteners so they don’t fall out of place, and put it in the filing cabinet. Make sure you don’t forget to create these folders separately. My Bank Checking – Year My Bank Savings – Year Petty Cash – Year 2003 Deposits (Owner’s Name) Distributions When making your Deposit folder, as I showed you in the Accounts Receivable section of Chapter 5, it is of the utmost importance that you make a photocopy of all checks that are deposited into your business checking account. It doesn’t matter if they’re from you, your long lost aunt, or your customer. Photocopy it! If you don’t have a copy machine, nine out of ten of you will at least have a scanner or a fax machine. Fax machines make copies too, and scanners are brilliant for saving paper. You have two options for making your deposit, one being the bank-supplied deposit slip that you fill in by writing all the checks that you are endorsing and depositing to your bank account, and the second being the QuickBooks® printed deposit slip. Either way, make sure you staple each check copy to the deposit slip and file it in your Deposit folder. This way, you have absolute, beyond a reasonable forensic trace evidence doubt certainty that what you are claiming as a deposit, whom you received the money from, and what bank account it went to, is true. If you don’t, you’re the one who is going to have to possibly prove all of your records to the wrath of Gov. Good habits make for clean accounting, and strong businesses. You can also think of it this way. If I had to come into your office and put together your business in a financial manner, can you imagine how much I would end up charging you for sorting through your boxes of junk? I actually had a
client once who dropped off five very large boxes of invoices, bills, checks, receipts, and rat droppings. It was the most disgusting thing I had ever seen. Half of the credit card receipts were eaten through. If your records look like that, then no wonder your business is struggling so bad to make it. He never made it, ended up folding and leaving me with an uncollectible bill. At least I got my 50% retainer up front. Those sure come in handy when you’re getting dropped on! I made a brief mention of scanners. Due to the enormous amount of paper that the United States alone creates, a scanner is a great invention to unload some of those boxes sitting up in storage above your garage. The following list shows the items and files that you must keep a certain period of time, or even your entire lifetime. Original documents are important in some instances: anything that has a certified mark on it, a legal document that must show an original signature, property deeds or notes. However, a good 95% of your paper can be scanned in and saved on a Zip Disk or a CD. If you choose to go this route, have at least three copies of the disk just in case. Honestly, if there were – God forbid – to be a fire, your paper would never be replaceable. If you had duplicate CDs or Zip Disks, or even originals in a fireproof safe, you would have your documents at the print of a button. Think of how many years of files you could save on one CD; yet those boxes of paper are going to pile and pile until you can’t walk into your garage or office any longer. When your documents are a few years old, scan them onto a CD or Zip disk. You can do it with your bank statements, tax returns, deposits, vendor invoices, customer invoices and cancelled checks. Just make sure on your cancelled checks that you scan both the front and the back to show proper endorsement. Once you are absolutely sure that your scanned copies are safe and accessible, you can destroy your paper copies.
9 Record Keeping This is IRS and State regulation on the amount of time required to store documentation relating to your business. Keep Forever Tax Returns (IRS, State, Payroll, City, 1099) Bank Statements Canceled Checks Financial Statements that correspond to the tax returns Bank Deposit Slips Cash Receipt Folder (copies of the customer payments, plus the deposit slips) Payroll reports and payroll taxes Seven Years Accounts Receivable Invoices Accounts Payable Invoices Bank Notes (unless they are longer than a 5- or 7-year note); use your judgment Unfortunately even if you’re past the “Audit Safe Zone” which is normally three years, you can still be audited. These occurrences usually come with very bad circumstances such as Fraud, Embezzlement and Tax Evasion. That is why it can be wise to keep forever provable documents such as bank statements, tax returns, deposit slips, etc. If you scan them in, you don’t have to worry about storage, and you will always have them even if you don’t want them.
Chapter 8 Business and Personal Taxes
In order to ensure that you don’t mess up your personal or business tax return, I’m not going to show you how to prepare them. Call it a conspiracy or just plain intuition. They are frustrating, stressful and a complete pain in the butt unless you have the crayon form (1040EZ). However I will point you in the right direction. If you still think you have the ability and know how (only you can be the judge of that), then invest $345 (the last time I checked) and take a tax class at H&R Block or Jackson Hewitt. They are very detailed and beneficial, and unless you’re a complete non-numbers person, you will learn something from it. Tax classes usually start in September of every year. The course lasts about 8 weeks. It is a very in-depth class that provides you with excellent study materials and resources to learn how to prepare individual and small business tax returns. They cover depreciation, itemized deductions, all the way to IRAs. I truly believe that this course is worth the money.
Now here is the common sense question of the day. How much do you think it costs to prepare a personal and business tax return? The going rate for preparing a tax return depends on the complexity of the return, and the number of forms you have to file. A CPA will charge you at least $450 to prepare a personal return with a Schedule C (business return for Sole Proprietors). A Licensed Tax Preparer will cost you at least $225. If you are a Corporation, Partnership or LLC, your tax return from a CPA will cost you a minimum of $750 for the Corporate Return, then at least $275 for your personal tax
return. An Enrolled Agent will charge you at least $500 for a Corporate, Partnership or LLC Return. If you signed up to take your H&R Block tax course, you’re already out $345, now you have to purchase the tax software because doing it manually will take you too long. TurboTax®, a product from Intuit®, runs about $69 for the Federal version and $29 for the State version. Now add all three expenses together and you’ve already spent over $550 just for the tools to prepare a stressful tax return. I can guarantee that a good CPA, Enrolled Agent, or Licensed Tax Preparer will save you that $550 plus some, in missed “legal” deductions that you might not have been aware of. That being said, I will tell you what “small business” deductions and mistakes to try and avoid. The first major mistake a small business owner makes is to think they are beyond paying taxes because they have “write-offs.” Instead of having the convenience of your employer deducting your withholdings every week from your paycheck, you are now responsible for “putting aside” those withholdings so you’re not sandbagged with a major tax bill due at the end of the year. The IRS and your State will require you to pay Quarterly Taxes. Your Quarterly Tax Payments are due as follows: Due January 15th (4th Quarter) Due April 15th (1st Quarter) Due June 15th (2nd Quarter) Due Sept 15th (3rd Quarter) The first year that you start your business, the IRS and State will give you one allowance if you underpay your total tax liability. The next year, however, they will penalize you to their heart’s content. If you have a good Tax Preparer or CPA, they can estimate your annual earnings and give you an assumption of what your tax liability for the year will
be. We take that assumption and divide it by four (each quarter) giving you your quarterly tax payments. The hard part is looking into our crystal ball and telling you how much money we think you’re going to earn, and how much of that earned income is your taxable profit. I would always come within 1% of my client’s total tax liability. Not bad for assuming how much they earned, when businesses change day in and day out. You can take a general rule of thumb to your own situation. You know the Cash Flow Forecast that I had you create – the one that is going to help you keep your business finances clear of any surprises because you can budget your money? Get that handy, and look at your first year projection. How probable do you really think it is that you’re going to make that many sales or have that much billable time? There is no guarantee and we all know that. As your business progressively grows each month, it is still a baby. You need to compare your actual with your Cash Flow Projection and see how close you come to your projected number. If you’re working diligently and haven’t given up on the hard battle of self-employment, my rule of thumb is that your actual is 40% less than your estimated cash flow after the first 4 months. Unless I know everything about your personal and business financial life, I cannot tell you or guarantee what your tax liability will be. If you pull out your prior year tax return and look at the tax bracket rate that the CPA or Tax Preparer told you that you were in, you can already add 15.3% to it for SelfEmployment Tax if you think your business Net Profits are going to be close to the same as your previous Payroll Wages. Let’s assume that your Federal Tax Liability was 25% and your State Liability was 4%. There are a few items that you must know in order to estimate what your tax liability will be for the tax year. If you are consistent with your QuickBooks® accounting, and can run a Profit and Loss report that is accurate, you can
estimate your tax liability within reason. The hardest part of self-employment is socking money away into a savings or money market and not touching it. It’s especially difficult when you have vendors or sub-contractors who need to get paid and your cash flow is slow. Unfortunately the Tax Man is a bill too, another vendor waiting in line for their payment. You are not above the Government and it will bite you in the butt if you think that you are. The reason I don’t do taxes anymore (except a very selected few) is because they tick me off. Why should I do something that I don’t enjoy doing? So I decided to save my sanity and sub the work out. If you are consistent with taking a percentage clean off the top of every customer payment that you receive and deposit it into your bank account, transfer that percentage into a savings or money market account, and sit on it until each quarterly tax payment is due. Based upon the 2nd Year Cash Flow Projection, Joe’s tax bracket, married with 4 dependents, is 20%. If Joe were single, it would be 29%. I’m going to figure out how much money I want Joe to take from his customer deposits each month and transfer to his savings account. Because we know that our 20% tax liability is based upon our Net Profits, we don’t want to take 20% out of each customer payment because we would be taking too much. If I look at Joe’s 2nd Year Cash Flow Projection I want to see what we’re assuming he’ll earn. On the next page is the 2nd year projection. If you notice in the bottom right-hand corner, I have an extra field for tax liability. The number in this box is the total year Owner Draws plus the total year’s Net Profit. Remember, unless you are on the payroll and deducting payroll taxes, a draw is not an expense, it’s part of your Net Profit. If all goes according to plan, by the end of year two, Joe would have profited $38,127.15. The thing that is going to really hurt Joe is the Self-Employment Tax. 15.3% of thirty-eight grand is a big chunk of
change: $5,833.45, to be exact. So automatically, we know that Joe needs to put aside at least $5,833.45 over the entire year. Each quarter he would owe $1,458 just in SelfEmployment Taxes.
If I go based upon this Cash Flow Projection, 20% of the Net Profit $38,127.15 would be $7,625.43 in total tax liability. Now you can take that $7,625.43 and divide it by 4 (quarters) equals $1,906.36. Joe has to have in his hot little hands, over $1,900 each quarter to pay in for his taxes. That means he needs to save $635.45 per month to pay that tax bill. ($1,906 / 3 months in a quarter) See how quickly that could add up? That is why it is so important to be on top of it. If you’re prepared and understand what you need and why you need it, you’ll be better off than the next guy. Your business won’t fail because your entire life is levied by taxes. Now I want you to look at Joe’s projection 297
again and see how much money he is bringing in on average each month. Just take the total estimated gross sales of $73,646 and divide it by 12, giving you an average of $6,137.16 per month. In order to cover the quarterly tax payment, Joe has to be able to take 10% off of each customer deposit that goes into the business. He has a couple of red (negative) months of cash flow, but if you average the entire year projection, it is possible. The not so rewarding part is recognizing the fact that Joe’s estimated cash profit of $13,627.15 (look at the previous page’s spreadsheet) is going to be eaten up by $7,244 in taxes. So reality sets in and he only walks away with $6,383 in his hand ($13,627 - $7,244 = $6,383). This is the not so pretty truth about Self-Employment; however, Joe has two things that an employee doesn’t have. He owns the business, and he can hire a professional Tax Preparer to save, plan out and create a strategy for his taxes. Just Incorporating, I could have saved Joe over $3,100 in Self-Employment Tax, and he would have ended the year with $9,483. Now keeping in mind that this is just a projection, it is pretty much the same thing with your quarterly tax payments. They are a projection of what you think your tax liabilities are going to be. Even if your business did not meet the assumption of your Cash Flow, keep the same principle in mind. When your accounting is more accurate, and you can go into QuickBooks® and run a Profit and Loss statement from January through March (or whatever quarter is due) that gives you your actual numbers, you can make your estimated tax payment based upon that number. Below is a basic layman’s percentage guide that you can use in determining how much you should expect your taxes to be. This guide does not include itemized deductions, child tax credits or earned income
credits. It is completely based upon your business earnings, Self-Employment Tax Liability and Federal Tax Liability. All deductions are icing on the cake. Tax table for Self -Employed This table includes Self Employment Tax Liabilities
Single no dependents Business Earnings Business deductions Taxable Income
25,000 8,500 16,500
45,000 18,000 27,000
65,000 23,000 42,000
90,000 32,000 58,000
Self Employment Tax Federal tax Total Tax
2,524.5 844 3,368.5
4,131 2,201 6,332
5,934 4,804 10,738
8,195 8,827 17,022
Fed Tax Bracket
25,000 8,500 16,500
45,000 18,000 27,000
65,000 23,000 42,000
90,000 32,000 58,000
0 0 0
3779 473 4252
5934 2276 8210
8195 4511 12706
Fed Tax Bracket
State (depends on yours) Tax Bracket
State (depends on yours) Tax Bracket Total Tax Bracket
Married, joint a couple of monsters (4 dependents) Business Earnings Business deductions Taxable Income The reason why this liability is zero is because he qualified for the earned income credit, which paid for the selfemployment tax liability.
Self Employment Tax Federal tax Total Fed Tax
Total Tax Bracket
There are four columns in which each column has an estimated taxable income line. As the income goes up, so does the tax bracket. If you think your business is going to generate a profit from column 4, and you’re single, your tax bracket is 34%. If you were married with 2 kids it would be 23%. Multiply your profitable earnings by the percentage that corresponds to your column, and that is your “estimated tax payment.” If you have estimated based on an entire year’s profits, divide the total by 4 quarters to come up with each quarterly payment due. If your profits are above $58k annually, have a CPA estimate your tax liability.
The Tax Laws consistently change. This tax bracket gives you a thumbnail view of where your tax liability percentage may be. To have a more accurate estimate of your tax bracket you must check with your tax advisor.
The other common questions and misconceptions that small business owners have are what is deductible and what is not. 9 Health Insurance – At this time, a self-employed individual can claim up to 70% of their health insurance premiums, but you can’t claim it on your business tax return (Schedule C). It is deducted from an entirely different part of your personal tax return. It is okay to have your business pay for your health insurance premiums, but when expensing them on your financial reports, you need to separate what is your health insurance, and what is possibly your Employees’ health insurance. Your Tax Preparer or CPA will ask you when completing your tax return how much of it was yours. Within the next few years, it is supposed to be 100% deductible. Isn’t it about time!!! 9 Luxury Vehicles – In this day and age, a car costs as much as a house used to. Unfortunately, the allowance of a nice big fat write-off isn’t there unless you have a heavy truck over 6,000 lbs. that you use for business. Normally this works the best for the blue-collar workers, as the construction industry is what builds this country. The white-collar workers, however, instead of pushing dirt, lumber and concrete, are pushing pencils, and driving the Beamers, SUV’s, and top-of-the-line autos. Because of September 11th, the IRS is giving a Special Depreciation Allowance that allows you to depreciate 30% of the asset right off the top. If you are using the general
depreciation method of taking the asset value and dividing it by the number of years of the vehicle’s life, that gives you the depreciation amount. With luxury vehicles, there is a dollar cap. That cap limit depending on when you placed it in service (when your business started using it) is $14,460. If your vehicle qualifies for the September 11th allowance, you can add another $4,600 to your deduction. So if you purchased a nice new top-of-the-line auto, keep that in mind when you paid $45,000 for it and can only write off $19,000. You can still deduct all of your auto expenses including loan finance charges; however, if you do not keep good notes and a vehicle logbook on what was business-related, the IRS (if involved in an audit) will not allow you to use that deduction. 9 Travel and Entertainment – You like to take your clients to lunch, a golf game, or give them tickets to the Broncos game. (Yes, I’m a Broncos fan. At least I finally got satisfaction when we won two Super Bowls in a row! I’m not as uptight about football as I use to be. Now if they lose, I don’t come to work in a bad mood for a week!) It is considered a client entertainment within reason. Some of the bigger companies buy season tickets for their employees and clients; and yes, that is a business promotion deduction. However, if you buy tickets through your business and only take your family, it is not a deduction. Unfortunately, those meals are not 100% deductible, but only 50%, and they’re still trying to lower that. You also can’t bring your wife or husband on your business trip and expect to write her or him off unless she is a majority shareholder or works for the company in a significant way. Las Vegas . . . well, if you find a really good seminar relating to your business and don’t overstay your welcome, it’s deductible, all but that thousand bucks you just lost
on the craps table. The IRS doesn’t like leaving money on the table, and if you can’t prove that any Travel or Entertainment expense was fully business-related, be careful on how much you try to get away with writing off into this account. The IRS goes by national averages, and if yours is significantly more than the other guys, you have a problem. 9 Business Use of Your Home – Business use of your home is a deduction, but it’s not as easy as one may think. You must measure the area that is used for your business and come up with a percentage. Most people think that because their rent was $1200 per month or their mortgage was $2,000 per month, and then the utilities, trash, water, etc. were another $600 per month, that because their business used 50% of the house, then 50% of the expenses are deductible. This is wrong. Almost every deduction the IRS allows is based upon a percentage ratio adjusted against your Net Earnings, and not a dollar figure. Just because you spend $2,600 per month for your general household your deduction is not $1300. 9 Donations and Contributions – This is one of the biggest problems, so it needs explaining why that $3,000 donation receipt for that car you donated to the Salvation Army isn’t really worth a $3,000 deduction. Number one, you can only deduct the car as a donation on a Schedule A Form of your Tax Return. A Schedule A is the Itemized Deduction Form, and is the flip side of your Standard Deduction, and in 2002 that was $4,700 for Singe Tax Payers, $6,900 for Head of Household and $7,850 for Married filing Joint. Unless you have Mortgage Interest (own a house and pay interest on a home loan), State Taxes paid, Medical Premiums paid and donations in excess of the Standard Deduction for your filing status (Single, Married, Head of
Household) you can’t file the Form Schedule A. Number two, if your itemized deductions add up to more than the standard deduction and you can qualify to file the Schedule A, the donation is a percentage of your Net Income. This is the most confusing part, and they do this for a reason, which is keeping you continuously unable to understand the ridiculous tax laws. If Joe’s Net Income on his personal tax return including the business’s Schedule C was $37,500, and he met the standard deduction allowance to file the Itemized Deduction form, out of that $3,000 donation that he made, it would only affect his tax liability by $465. Yes, you heard me correctly; that $3,000 car is only worth $465 in tax reduction to the IRS. Now depending on you and your current cash situation, you may not care about the minimal tax break that you get from donating, and it does make you feel good to help someone else out; otherwise, if you are having a cash flow problem and could sell the car for $1,500, you would be better off, and you could donate $465 to your favorite charity. 9 Depreciation – Depreciation is the IRS’s way of regulating how much money you can write off at one given time. It doesn’t seem right or fair to the Standard Joe, but to the IRS it’s the difference between someone’s Net Profit of $125,000 or $25,000 because they bought a new Skip loader. So the government came up with this ingenious idea of giving our assets life. They giveth and then they taketh away. As a quick guide, the general rule of depreciation is taking the purchase price of an asset and writing off a portion of that dollar amount over the IRS’s life recovery period. The IRS and States are using the general MACRS depreciation, which is basically a straight-line method. Your asset life is broken down by classification, such as
Computers, Office Equipment, Furniture, Vehicles, Tools and Machinery, etc. If you have a computer that you purchased for $2,000 in January of a given year, the IRS asset life is 5 years; you would take $2,000 divided by 5, which is $400. That is your annual depreciation. Here’s one for you: the same as a computer, computer software has an asset life of three years. We all know, just as with QuickBooks®, the majority of the users will end up purchasing the upgrade the following year when the bigger better faster one comes out; and with a computer, we all know they crash in three years. At least the IRS allows you to dispose of fixed assets and lets you fully recover any unused portion. 9 Section 179 Election – The IRS does allow you to take a one-time deduction of an asset purchased in the tax year being filed, up to $24,000. Each year the amount is increasing, which is a great benefit to the small business that needs to purchase expensive equipment. This rule does not apply to Luxury Vehicles, as explained above. If you have a good Tax Preparer, they will use only what they need for the current tax year, allowing continued or additional depreciation deduction in following years if you know you’re not going to purchase a lot of assets in years to come. Otherwise you could shoot yourself in the foot if you’re not doing such tax planning. It’s nice to have a big tax break in a given year, but then what happens the year after that? If you only need to use $25,000 of a $50,000 piece of equipment to put your tax bill at a comfortable level, it is worth it to have those extra five to seven years of a $5,000 depreciation expense, and it is completely law-abiding. 9 Owner Draw – This is the third time I am going to say this, because no matter how many times I try to explain in layman’s terms why a Draw is not an expense, the
client brain knows it to be true, but does not want to accept it. If at the end of the year you ran your business Profit and Loss Report (the “How much money did I make?” report), and your Net Profit was $25,000, but you wrote yourself checks throughout the year for $24,000, your Taxable income is not $1,000 ($25,000 $24,000 = $1,000). Had your business not profited (earned free and clear from expenses) that $25,000, you would have never been able to give yourself $24,000. The only thing you are doing is taking your profits early each time you cut yourself a check. So, if you think because you posted the checks that you paid yourself to the payroll expense account and thought you were being sly, remember you need to have payroll tax returns to back up the expense claim out of that account. If I were to review your QuickBooks® file and see this, I would unfortunately end up being the messenger and telling you that no, your profit is not $1,000, it is $25,000, and we all know what happens to the messenger! Then there is the angle, what if I put myself on the payroll? If your budget allows for it, do it. This is the difference between putting yourself on payroll and collecting a draw with a Schedule C Business Tax Return. You pay your Self-Employment, Federal and State Tax immediately and don’t do it on a Quarterly Basis. There is really no tax break and this is why. Your Salary for the year is $25,000 and you as an employee must pay Social Security and Medicare on these wages of 7.65%, which equals $1,912.50; then your company has to match it (duplicate the payment) to the IRS at 7.65%, which is another $1,912.50. Add the two rates together and 7.65% + 7.65% = 15.3%. Funny how that 15.3% is your SelfEmployment Tax – so the bottom line is your profit is $25,000, your SelfEmployment Tax is $3,825, your Payroll Wages are $25,000, your FICA/Medicare
and Social Security tax liability between you and your business is $3,825. There is no difference. The IRS will get their money no matter how you account for it. If you incorporate, you will save thousands of dollars in Self-Employment Taxes.
Unfortunately taxes are a necessity to keep the big machine running. Without them, we would not have 90% of the opportunities that the United States has which other countries do not. Yes, the system is out of control, but by the same token, would you rather live in a third-world country that has nothing, and survive off of $10 per week? Americans are spoiled, and in being so we must pay the price. We like nice fancy things, and have more material items than just about any country, and complain about our Government. I would rather be able to walk down the street that is clean and well kept, enjoy the freedom that our country has fought so hard to keep, and ask myself if it’s worth 32% of every dollar I earn. My answer would always come back to yes, of course it is. Now ask me if the insurance companies are entitled to the other 32% and my answer is absolutely no, fix that system, it’s out of control! Don’t attempt to try and pad your expenses, hide your cash or lie about your earnings. I have yet to see the very few who don’t get caught, and it’s not worth it. If you’re already dishonest with tax evasion, your karma will come back around and get you in the end. Your company will never make it. Don’t ask your Tax Preparer or CPA to hide profits or lie for you either. If they’re good, they will get you every legal deduction possible. You would be surprised at how much that will do for you anyway. Just do your American duty, and plan for your success, which includes paying your taxes. If you follow the steps in this book, keep good records and are an honest business person your chances of losing an Audit with ridiculous penalties, tax liabilities
and interest are not that great. Besides, it will keep you out of prison, and this time I’m not joking.
Towards the end of the year, if you have not found a Tax Preparer, start looking and interviewing in your area. My best suggestion is to ask your family or friends whom they use and if they would recommend them. My clients are always more comfortable coming to me from a referral rather then calling me out of the phone book. This would give your new Tax Preparer time to get to know you and your business as well. They can review and see where you’re at instead of blind-siding you will a big look of “duh” on their face when you all of a sudden have a tax bill of $14,000 due on April 15th without paying in any estimated taxes. It makes for a much better working business relationship.
At the end of the year, your Tax Preparer will provide you with a list of items that they need from you in order to prepare your Income Tax Return. In the real world, 99.9% of the CPA’s and Tax Preparers (excluding H&R Block and Jackson Hewitt) use QuickBooks® for their clients. You can make an Accountant’s Backup and give it to your Tax Preparer. They can review, run and post journal entries to your file, create your Corporate tax return or Schedule C from that QuickBooks® Accountant’s Backup, upload the changes to a floppy disk and install it back on to your computer. The data that they corrected or added to will then be merged into your working QuickBooks® file. You cannot, however, give them a backup of your original working QuickBooks® file. You will not be able to import the changes without losing everything that you’ve done on your computer from the day you made the working file backup to the day the CPA gave
the changes on a disk back to you. It has to be the Accountant’s Back-up for it to work. To do this, from the QuickBooks® file menu, select Accountant’s Review, Create Accountant’s Copy.
Select Create Accountant’s Copy
You will be prompted to save it to a floppy (generally drive A). Insert a 3 x 5 floppy disk into your drive and click Save. If all goes well it will say, “Accountant’s Copy has been successfully created.” Your QuickBooks® data file will now say Accountant’s Copy Exists at the top of the screen.
Save on a floppy disk to give to your Accountant
If your QuickBooks® file has a lot of data, it is not uncommon to use a lot of disks. I have clients who need 10 disks to make an Accountant’s file.
If you have correctly made an Accountants File, your QuickBooks® file name will say “Accountant’s Copy Exists”)
While you are using your QuickBooks® file when an Accountant’s Copy exists, you can not move or sort your Chart of Accounts, delete prior transactions such as checks, deposits, and invoices, or change names of accounts, vendors, customers, employees, etc. You can still perform the day-to-day bookkeeping functions, but you cannot do a few selected items such as the ones listed above. Once your accountant makes any changes to their copy of your file, they will give you back a floppy disk with the data to be merged into your current QuickBooks® file. The file on the disk should be an .aif file. Put the floppy disk in your computer’s A drive, and from the QuickBooks® top menu, select File, Accountant’s Review, Import Accountant’s Changes.
Select Import Accountant’s Changes.
QuickBooks® will prompt you to back up your data before you proceed.
Click OK and save it to your computer’s hard drive.
If your “A” drive is showing up, you need to change it to “C” by selecting Browse. Your “A” drive has a disk in it already…
Select the C drive, save it to your QuickBooks® File location under C:\Program Files\Intuit\QuickBooks Pro. Click OK to save.
Click on OK to save, and you should receive a nice little note saying “Your data has been backed-up successfully.” Click on OK to continue to import your Accountant’s Changes. The next screen will be a template that says “Import Changes from Accountant’s Copy,” and will ask you where you would like to import them from. Because your Accountant
supplied the import file on a Floppy Disk that you inserted into your “A” drive, you need to select that drive.
Select 3 ½ Floppy Drive A.
You will then see all the files that are saved onto the floppy disk, and due to unfortunate circumstances, the name of the QuickBooks® Accountant’s Backup file ends with .aif, the same as a type of music file. If your file has a sound box next to it, it is okay, however; Windows has just recognized the file as a sound file rather than a QuickBooks® file. It will still open in QuickBooks®.
This is the Accountant’s File. Click on it, then click Open.
File type, AIF file.
QuickBooks® will then import the data, and you should have a nice little window pop up that looks like this.
Click OK, and all is good.
If you have a tax preparer who didn’t import adjustments, changes and journal entries into your QuickBooks® file, you will need to make a few adjusting entries to “close” out your prior year’s books. The reason you would do this is because of your Equity accounts such as Capital Contribution and Draws. QuickBooks® will continuously add them without stopping. If at the end of the year your total draws were $24,000, and you didn’t close them out, by April of the new year your drawing account could say $32,000, and to a bank that might look bad. You would also not know how much you actually took in draws or contributed to the company. If you had partners, that would be a big mistake, as we all know partnerships are a very touchy subject because of trust issues. If you can avoid a “he said . . . she said” argument, you will be better off.
To close out your year-end accounting books, the first thing you need to do is make sure your tax returns were filed. If you are a Corporation, request that your CPA make the
adjusting entries, because if your balance sheet is off, that’s not a good thing. If you’re just a Sole Proprietor, take out your current tax return. The accounts that we will indeed affect will be your Fixed Assets (accumulated depreciation) and your Capital Accounts. From your Income Tax Return, find your Schedule C Business Income (if in order, page 3), and locate on the left-hand side of the return your Depreciation deduction line 5. From the QuickBooks® top menu, select Banking, Make a General Journal Entry.
Select Make a General Journal Entry.
My Journal Entry numbers are associated with the year and month that are being affected. Change the Journal Entry Date, the end of the year the taxes were filed.
You are decreasing your fixed asset account called Accumulated Depreciation, and increasing your Expense account (because you’re writing off the portion allowed) of Depreciation. Joe’s is split from COG Depreciation and regular Depreciation Expense. If you don’t know yours, ask your tax preparer.
Click on Save and New if you are going to make another Journal Entry. The next account that you want to clean out are your Capital Accounts. These do not show up on your Schedule C portion of your tax return because you’re a Sole Proprietor. You will get this information from the “How much money do I have and owe?” report called your Balance Sheet. From the QuickBooks® top menu, select Reports, Memorized, Memorized Reports. Double-click on the Balance Sheet report located with your Accountant Reports.
Change the date to the last day of the fiscal year.
Your Accumulated Depreciation will be a negative number. If it’s not, you posted wrong. You can go back to the entry and switch it out to change it.
We can see from page one of the Balance Sheet that the Accumulated Depreciation is booked into our Fixed Asset account. If yours is showing as a positive number and not a negative number, this means you accidentally posted your debit and credit backwards. Easy fix – go back to the journal entry by either double-clicking on the Accumulated Depreciation number on your report or going to the Chart of Accounts. Select that
journal entry by double-clicking on it; it will open you back up to the original entry. Go ahead and override the old entry by moving the amount in the debit column to the credit column and the credit to the debit, click OK to save your changes, and all should be fixed. Now you need to take the Liabilities portion of your Balance Sheet and find your Capital Accounts.
Our adjusting entry will be based on these yearend numbers.
Here is the fun part, the debit and credit confusion. Just remember anything can be fixed, and you’ll know it’s wrong if your balance sheet shows a $7,020 balance in Contributions rather than a $0.00 balance. Instead of making you try and wing a journal entry here, the easiest adjustment that you can do to clean out these accounts is, from your Chart of Accounts template, scroll down to your Capital Accounts. Double-click on the first account, your Owner Draw. This Journal Entry date is going to change to the first day of the new year because you still need to know as of 12/31 what you put in and took out of
the Company, but January first you’re wiping the slate clean. You can see on Joe’s Draw Account, he has a negative number, and to clean it out we need to match that number as of January 1st with a positive (increase) number.
Our account balance as of 1/01/04 is now zero.
Enter the transaction as if you were posting a check. Leave the Payee field blank. QuickBooks® automatically changed the entry into a Journal Entry. Post your Capital Closing Entry to your Retained Earnings Account.
When posting your closing entry, the double-entry account that it is being posted to is your Retained Earnings Account. Do the same for your Contributions Account. This time, however, you will be decreasing your Contributions because the balance is a positive number. Now you can start fresh with new running totals for your Capital
This time, you’re decreasing the balance to zero out.
Accounts. If you have partners, there may be other tax reasons for your accountant to want an overall contribution amount, have your Tax Advisor close out your books. If you don’t properly close out your books each year, the only negative impact that it is going to truly affect is your Balance Sheet. The importance of a clean Balance Sheet lies in the presentation of Financial Statements for banks, and for your Tax Returns. If you are in need of money, whether a SBA Loan or Company Credit Line, or are involved in an Audit, your Balance Sheet tells an important story about your current and past cash situation. This part of accounting is confusing for the Standard Joe, and that is why I recommend you hire a tax professional to help you. Your job is to keep on top of your day-to-day bookkeeping and make sure your QuickBooks® file isn’t a mess; their job is to do all the fancy accounting work.
Chapter 9 Troubleshooting, Mistakes to Avoid and Stupid Questions
9 You printed Accounts Payable checks using the Bill Payment, but you can’t find them in your Checkbook Register. To find out where they are, open your Chart of Accounts and look at all of the bank accounts on the top of the list, including Petty Cash. You might notice right away which account looks as if it has less money in it than you thought. If you don’t see it, double-click on each of the bank accounts and look at the templates to see if you can find your checks. If you see them, double-click on the check until it opens it up into a check template like this. If you still can’t find your check, click on the Find icon below your menu list, then click on the Advanced tab and type in the name of one of the bills that you have paid. This check was written out of the Checking. If it were incorrect, I would change it here by selecting a different bank account and clicking on the Save & Close
Select the vendor name here and click Find. All transactions for the vendor will show up on this screen.
There are two transactions for this one payment because you first entered it as a bill, then you paid it.
Double-click on the bill payment to see where the check was paid from.
9 You posted a check, invoice, bill or payment to QuickBooks Pro®, but you can’t find the entry. In most cases, you entered your date wrong on the transaction. Normally it’s the year that is not correct. Click on your “Find” button, and enter the amount of the entry on the Advanced screen. Make sure you don’t select a date entry, so it searches the entire database. Once it pulls up the entries that match the transaction you have entered, double-click on the entry and view the date. If that is the problem then change the date. 9 Your Income Statement’s (Profit & Loss) Year to Date Net Income doesn’t match your Balance Sheet. Generally when this happens, your fiscal year report period is incorrect. If you’re running a monthly financial report from May 1st to May 31st, your Net Income on your Balance Sheet is not going to match because your Balance Sheet is calculating the entire fiscal year. Your Income Statement is only calculating the month of May. You need to run a Year to Date report showing all of the months combined. Make sure your fiscal year is correct as well. If you’re not using the standard calendar year, your reports need to reflect that.
9 You can’t find your company’s QuickBooks® file. From your computer click on the Start button on the bottom left of your computer. Select Find, Files or Folders.
This is my little Ems. She’s going to be in the FBI.
Select Find, Files or Folders.
Your QuickBooks® working file is named a .qbw file. That is abbreviated for QuickBooks® Working File. Your Backup (saved) QuickBooks® files are named .qbb files. From the Find screen you will type in your company name of the QuickBooks® file that you are trying to find.
This is my Kalie; she’s going to be a veterinarian.
Look in your C Drive unless your files are saved on a Network.
Type in part of your company name and click Find Now.
Your computer is now going to search for all the files that have your name associated with the file. You will see a number of files show up on your template. You should also see your QuickBooks® Data File.
Here is Joe’s QuickBooks® File. It is located in the following folder on my C Drive. Your working file will say QuickBooks® Company File.
Joe has a number of different QuickBooks® files showing up. That is because one is an Accountant’s Copy, one is a Backup and then there are the working files. Normally you will only have one working file. I have two because one is the 2003 version of QuickBooks® and the other is the 2004 version, so I’m sure my templates won’t change for this book. If you have more than one QuickBooks® Company file, you need to be absolutely sure you are working out of the correct file. The easiest way to do this is to open the first file, look at when the last recorded check or entry was made, then open the second file and look at the last entry date. Make sure you are working on the file that has the most recent activity. From the Search screen you can double-click on the QuickBooks® Company file to open it.
9 You reconcile your bank or credit card accounts, and you can’t find where you’re off. The bottom line question is, is it worth it for you to fret over 5 cents? No it’s not, it will cost you more per minute looking for that 5 cents, so post it to Cash Over-Short. 9 Balancing your Checking Account. If your beginning balance is incorrect from the last time you reconciled your bank or credit card statement, nine out of ten times you accidentally cleared a check or deposit that hasn’t really cleared the bank yet. The reason this can happen so easily is that there is a box on your Checking template that can be marked or unmarked without you really knowing you did it. This will only happen in older versions of QuickBooks®; the 2004 version will prompt you to let you know you are making a mistake.
If you mistakenly put a checkmark here, it will clear the check, causing your beginning balance to be off.
To try and find your error, subtract the QuickBooks® beginning balance that is on your Reconciliation template from your bank statement’s beginning balance to see if you can find a check or deposit that matches that number. Let’s say Joe’s beginning balance from his bank statement as of 10/31/03 was $6,464.17, yet QuickBooks® is
showing a beginning balance of $6,274.54. If I subtract $6,464.17 - $6,274.54, my beginning balance is off by $189.63.
Your beginning balance.
The first thing I try to do is find an entry that matches $189.63. To do this, use your CLTR F (Find) key and type in the amount of the dollar discrepancy. If you’re lucky, you will find it right away. Joe can’t find his. During the prior month, he must
Joe’s not so lucky.
Type in Amount here and click Find.
have accidentally cleared, un-cleared, or deleted an already cleared transaction. QuickBooks®’ newer version can locate discrepancies when you are reconciling your bank statements.
Select Locate Discrepancies.
Select Discrepancy Report.
QuickBooks® will search for any entries that were modified after the prior bank statement was reconciled. If you’re lucky, it will show up. Today was Joe’s lucky day. It also matches the exact amount that the bank statement is off.
Here are our entries. They were un-cleared after they had already been cleared.
Your options after locating the errors are to either undo your last reconciliation and re-reconcile it, or take a layman’s shortcut. Close out the Discrepancy Report window, and click on Restart Reconciliation, which will bring you back to the
standard bank reconciliation template. Type in the prior bank statement balance of $6,274.54 in the ending bank statement box, and click Continue to reconcile. You will notice that the difference between the prior Ending Balance and the new Ending Balance is that $189.63, and we already know what two entries were mistakenly uncleared, so we are going to re-clear those entries.
Mark them as cleared; now your difference is zero. Click on Reconcile Now to finish.
After you have corrected the beginning balance, go ahead and reconcile your new bank statement. The reason I didn’t tell you to just do the entire thing at once is so you know how to fix it. If you weren’t as lucky as Joe, can’t find what was wrong and your balance is still incorrect, and the amount isn’t that big, go ahead and create a dummy check as I showed you before. Post it to the expense account we created called Cash Over-Short. If it’s a deposit that is off, go ahead and post it in your Make Deposit template to the Cash Over-Short account as well. Then follow the steps above to re-reconcile your bank to the correct beginning balance. If your Cash Over-
Short account gets excessive and has a high dollar figure in it, you need to find your mistakes, because there is more of a problem there than meets the eye. 9 Balance your checkbook without a beginning balance. This part is for the Chapter 3 people who weren’t a startup and had not reconciled their bank accounts before they started doing computerized bookkeeping. Follow the instructions for reconciling your bank statements, and when you come to the end after posting all of the checks and deposits that have cleared, QuickBooks® is going to tell you that there is a different amount between what they show and what the bank shows your balance to be. If you get a copy of your canceled checks, the checks that you missed and didn’t enter into QuickBooks® should be in that envelope. If you have any, post them as you would any other check payment to ensure you get the expense deduction. If it is a deposit that is on your bank statement, try to find out where and who the deposit came from and post it just the same as any other deposits. If, after posting any nonrecorded checks and deposits, you still have a difference, and for the life of you, you haven’t a clue what it’s for, you need to make an adjusting entry so your ending balance is correct. If you feel comfortable with knowing that the amount that is out of balance was indeed a business expense but you don’t know what expense it was for, go ahead and make a dummy check and post it to your miscellaneous expense account. If it’s for a large sum of money, find out what it is because you don’t want that “I don’t know” lingering around, especially if you’re ever involved in an audit. If it’s a deposit that is off, let your conscience be your guide on determining whether it was income or a capital contribution. Either way, post a dummy deposit to either your Gross Income Account or your Capital Contribution Account to clean it out.
Once the difference in the bank balance and QuickBooks® balance is $0.00, you can reconcile and print your reports. The next month should have the correct beginning balance, and you will have a nice clean set of books from here on out. 9 You have vendor and customer invoices showing up on your aging that have already been paid – how do you clean them out? If you’re absolutely sure that you paid the vendor bills but not from the Bill Payment screen, you can delete those bills as long as you are not deleting a prior year transaction. Or you can issue a credit from the vendor to clean it out. Your customer invoices will usually look like this.
Double-click on the payment
The payment is in the system, but it’s not posted to the invoice.
To clean a paid invoice out, double-click on the payment; QuickBooks® will take you to the Receive Customer Payment screen for this transaction. Click on the invoice that this payment was supposed to pay to clean it out.
Mark the box of the invoice the check paid.
Click save and close to record your changes.
QuickBooks® will bring you back to your open invoice report where you should now see a clean report. No more hanging customer payments.
Customer Account is cleaned up.
9 It’s a new year and you can’t find Customer Invoices, Checks and Bills that you entered at the end of the year. If you type in the date manually like I do instead of using the mouse to pull, drag and move, when I can type faster (even I do this – shhhh), the year is usually the thing that is wrong. When I type in the date, I normally type 09/30 and hit my tab key because QuickBooks® will fill in the year.
When it’s a new year and you’re trying to post something in December, yet you’re entering it in your computer on January 5th, the current year is the year that is going to pop up on your date. When you’re on a roll, you don’t realize you’re doing it until you go to print a report and you can’t find any entry that you made. That’s because if it was 12/31/03 and you weren’t paying attention, QuickBooks® put in the year 04, and recorded it for the end of the new year. You need to find all the entries that you made that are wrong, and change the year to the correct year. The easiest way to find each entry is by using your QuickBooks® Find key and only look for date-range transactions.
Only include the date range.
QuickBooks® will look for all transactions in that date range. Not limiting it to a specific Vendor or Customer.
9 You took a lot of cash draws from the business to survive all year; are they considered income? If your business is a Sole Proprietor, the bottom line is, if all of your business expenses including Cost of Goods and general operating expenses minus your business income equals a profit, that profit is your Taxable Income. If you sold $50,000 worth of whatever you do for a living, minus $40,000 total of
whatever it cost you to do it, then your Company’s profit is $10,000 ($50,000 $40,000 = $10,000). But if you took $24,000 in Capital Draws all year to survive, in actuality your draws exceed your income by $14,000. Now if you took $14,000 from the business, you need to ask yourself where the $14,000 came from. Did it come from your savings? Your Equity Line? Or did you rob Peter to pay Paul – Paul being yourself, and Peter being all of your vendors who are waiting to get paid? If it’s from your savings, it’s your money. You already had it, and you used it to survive. Generally you would deposit any Capital into your business account to help the Company pay its bills. This is where you look on your Balance Sheet to see what the Capital Contribution account balance is. You would be surprised if you posted your entries to the correct accounts. Because of how I told you to set up your QuickBooks® file, your actual Cash Draws and Contributions are calculated by QuickBooks® to give you a Net amount of how much you either put in or took from the Company. If you robbed Peter to pay Paul, then yes, you could have excess tax liability for trying to write off expenses when you used the Company’s profits for your own personal gain. Generally this happens when you are using the Accrual Basis of accounting. You can’t go out and expect to buy a lot of toys while your vendors are footing the bill for your supplies. It is not ethical or good business practice. Your vendors are not a bank. They are providing you with the resources that make your business money.
If there is some type of stupid question that I forgot to elaborate on, my sincere apologies. I have tried to touch base on every simple aspect of business accounting without making a novel out of it. Bookkeeping and accounting can be a tedious and unwelcome job, and trying to explain it in layman’s terms so that the end user doesn’t get confused has definitely been a chore. I know that not everyone will be able to close this book and completely get it, and if you are one of those I hope you don’t give up. One lesson is not going to teach you everything you need to know; it does take time, and one day it will just click if you give it a chance. If there is anything that I’ve learned from this, it’s that my hands hurt from all of the cutting, pasting and typing, but if I’ve helped a handful of people to understand their books, then every keystroke was well worth it. Good luck to each and every one of you who seeks a different lifestyle all in itself, Self-Employment.
Helpful Phone Numbers and Websites I have QuickBooks, NOW WHAT? Available at: www.inhomebookkeeping.bizland.com www.amazon.com QuickBooks Pro® Software – a registered trademark of Intuit® 1-888-246-8848 (INTUIT) www.quickbooks.com www.intuit.com www.quicken.com
Internal Revenue Service General Information - 1-800-829-1040 Forms and Publications - 1-800-829-3676 Tele-Tax Topics - 1-800-829-4477 www.irs.ustreas.gov (You can also download forms and publications online using Adobe; the IRS has a link to download the free software from Adobe.) H&R Block 1-800-TAX-7733 Tax Course - $345 http://www.handrblock.com/info.html Mortgage Calculators www.erate.com Adobe Acrobat Reader www.adobe.com QuickBooks® Checks www.checkfamous.com www.mcbeeinc.com
A Account Types Accounting Methods Accrual Cash Accounts Payable Creating Vendors Entering Bills Paying Bills Accounting Quarters Accounts Receivable Creating Customers Creating Jobs Invoicing Receiving Payments Accounting Records Asset Accounts Auto Expense
9-11 11 11 11 28, 153 50, 54 153-158 161-162, 165 12 27, 121 51,54 188 70-72, 75 68, 136 292 27, 28 176-178
Customers Creating New Creating Jobs Invoicing Receiving Payments
55 51, 54, 55 188 70-72, 75 68, 136-140
D Deposits Customer Owner (Capital) Debits Depreciation Donations & Contributions Double entry bookkeeping
54,56, 139-140 68, 139-140 34, 35, 56 46-47 303-304 302-303 46-47
E Equity Estimated Tax Expenses
28 12, 294-300 29, 39, 40, 41
B Backing up files 82, 92 Bad Debts 140 Balance Sheet Bank Account 27, 30 Entering Checks 48-49, 57 Making Deposits 54,56, 139-140 Entering Bank Charges 70 Bank Reconciliation 207-215, 322-327 Bizfiling.com 11 Bookkeeping **The whole book** Budgeting 86-91 Business Types 8 Business Use of the Home 302
Financial Packages Financial Reports Fiscal Years Fixed Asset
98 55, 65-66, 172 296-298, 330-331 99-108 131-133 8, 24, 42 59 46-47 28, 33 60-62, 166-170 169-174 28, 33 31 8-9 29, 38, 39 104-108 294
286 270 11 28, 32, 175-180
G Glossary Gross Income
H Health Insurance H&R Block
C Calculating Interest Capital Contribution Capital Distribution Cash Flow Projection Cash Sales Chart of Accounts Checkbook Register Credits Credit Cards Entering in Charges Reconciling Setting Up Accounts Computer Checks Corporation Types Cost of Goods Costing CPA Rates
I Income Accounts 29 Income Statement 276-279 Aka – Profit & Loss Incorporating 8 C-Corp 9 S-Corp 9 LLC 9 Inventory 31, 123-129, 181-185 Invoicing Accrual Sale 70-72, 75, 122 Cash Sale 131-133 Item List 72-75
J Job Costing Adding Jobs Creating Estimates Progressive Billing Employee Time Setting up Budgets Vendor Bills Journal Entries
P 186 188 189 190-192 192-194 200-204 195 313
K L Liabilities Accounts Entering Charges Licensed Tax Preparer Long Term Liability Loans Payable Luxury Vehicles
28-29 64 28 33 300
M Merchant Accounts Memorized Reports Monthly Check List Miscellaneous Income
134, 141-145 77 112 258
N New Accounts
O Opening Balance Equity Opening Cash Flow CD In Microsoft Excel In Microsoft Works Other Asset Other Current Asset Other Current Liability Other Income Other Expenses Other Name List Owners Capital Owner Draws
Q QuickBooks Backing Up data Chart of Accounts Creating Accountants Back-up Creating Sub-Accounts Importing Accountants Chang Installing Item List New Accounts Pricing Software System Requirements
85 85 28 27 28, 33 29 29 52 34, 35, 56 34, 304
Record Keeping Reports Accounts Payable Balance Sheet Checkbook Register General Ledger Inventory Open Invoice Profit & Loss Report Profit & Loss Budget Job Profit & Loss Summary Sales Report Sales Tax 1099 Summary Retained Earnings
P Partnership Payroll Adding New Employees Paying Employees Payroll Liabilities Quarterly Payroll Taxes 941 Tax Form Time Tracking
Payroll (Cont) Setting Up in QuickBooks 221-232, 237 Sick & Vacation Time 234-235 Year End Payroll Taxes 248-252 940 Tax Form 250 W-2’s 251-252 W-3 Transmittal 252-253 Payroll Mistakes (not hiring a service…) Payroll Services 219-220 Entering Checks From 254-258 Petty Cash 31, 68, 174 Prepaid Expenses 31 Printing Checks 119-120 Invoices 130 Bill-Payment Checks 162-163 Payroll Checks 238
8,35 233-235 235-240 240-242 242-248 248 193-194
82 22 308-309 32 310-312 20-22 122-123 26 14 13-15 16
292 270 159-160, 281-283 273-276 114-118, 272 78-81 183-184 130, 280-281 276-279 204-205 196-199 283 149-151 265-266 34
S Sales Tax Cash or Accrual Different Counties Sales Tax (Cont)
33, 145-153 145-146 146-149
Invoicing Paying Sales Tax Liability Sales Tax Report Setting up in QuickBooks Savings Accounts Section 179 Election Self Employment Tax Service Charge Setting up accounts Setting up your account Sole Proprietor Start up Costs Subcontracted Employees Limitations on filing Setting up Preferences Setting up Vendors 1099 Returns System Requirements
128 151-153 149-151 145-147 31 304 9,10, 295-300 70 27-43 8 8,10 46-80 258 259 260-263 264 268-269 16
T Tax Bracket (estimated) Tax Due Dates Taxes Business Payroll Taxes 1099’s & 1096 Personal Taxpayer Identification Temporary Agencies Terms Time Tracking Travel & Entertainment Trouble Shooting A/P Checks Missing Balance sheet is off Can’t find entry Can’t find QuickBooks File Cash Draws Invoices not cleared Reconciling Checking Checking no beginning balance
299 294 293 12 55, 268, 269 293 13 218 122, 158 193-194 301-302 318 318 319 319 320-321 330 328 322-327 327
U Unemployment Tax
V Vehicles Vendors Creating New Entering Bills Paying Bills 1099 Misc. Income
176-178 55 50, 54 153-158 161-162, 165 55, 258
W Writing Checks
X Y Year End Accounting Year End Entries Yellow File Folders
287 313-317 289
Glossary Accounting cycle - The series of accounting activities included in recording financial information for a fiscal period. (When you record how much money you made to how much money you spent in a certain length of time) Accounting system – A process for providing financial information that will be useful to management. (A way to record your business earnings and expenses so you know what you did) Account name - The name given to an account so you know what it’s for. Accounts payable ledger – A report containing only accounts for vendors from whom items are purchased or bought on account. (It’s what you bought from your vendors and they allowed you to wait 30 days to pay) Accounts receivable ledger - a subsidiary ledger containing only accounts for charge customers. (It’s what your customers bought from you, and you allowed them 30 days to pay) Accrued expenses - Expenses incurred in one fiscal period but not paid until a later fiscal period. (They billed it to you, you haven’t paid them yet, but wrote it off on your tax return) Accrued Interest expense - Interest incurred but not yet paid. (They billed it to you, you haven’t paid it yet) Accrued Interest income - Interest earned but no yet received. (You billed it out, they haven’t paid it yet)
Accrued revenue - Revenue earned in one fiscal period but not yet received until a later fiscal period. (You billed it out, they haven’t paid it yet, but you pay taxes on it) Accumulated Depreciation - The total amount of depreciation expense that has been recorded since the purchase of an asset. (The IRS’s way of controlling what you write off as a business expense) Adjusting entries - Journal entries recorded to update general ledger accounts at the end of a fiscal period. (Your Accountants way of fixing all your mistakes) Adjustments – When your balances are off and you have no idea why. Allowance method of recording losses from un-collectible accounts- Crediting the estimated value of un-collectible accounts to a contra account. What??? (Writing it off to a bad debt account only if the IRS allows you to) Assessed value - The value of an asset determined by tax authorities for the purpose of calculating taxes. (Their way of making sure you don’t have too much) Asset - Anything of value that is owned by you. Bad Debts – When your customers don’t feel like paying you the money they owe you. Balance Sheet - A financial statement that reports assets, liabilities, and owner’s equity on a specific date. (It’s the How much money do I have, How much money do I owe, and How much money am I worth report.) 337
Bookkeeper - A person who does general accounting work plus some summarizing and analyzing of accounting information. (Someone who pays the bills, invoices the customers, and keeps track of how much money you have) Calendar Year – 12-month calendar starting January 1st and ending December 31st. Capital - The account used to summarize the owner’s equity in the business (It’s the keeping track of the money that you put in and took out of your business accounts) Capital stock - Total shares of ownership in a corporation. Cash Over - A petty cash on hand amount that is more than a recorded amount. (The account where you throw all your balancing errors into because you’re off by one cent) Cash payments journal – A special journal used to record only cash receipt transactions (Your petty cash account keeping track of all the McDonalds receipts that you have) Cash sale – A sale in which cash is received for the total amount of the sale at the time of the transaction. (They bought it from you and paid you right away for it) Cash Short - A petty cash on hand amount that is less than a recorded amount. (The account where you throw all your balancing errors into because you’re off by one cent) Chart of accounts - A list of accounts used by a business. (It’s your great bill filing cabinet with all your yellow folders in it) Closing entries - Journal entries used to prepare temporary accounts for a new fiscal period. (The ones that you will let your 338
Accountant enter so you don’t mess up your books) Correcting Entry - A journal entry made to correct an error in the ledger. (To fix your mistakes when you post your entries to the wrong accounts) Cost of goods sold - The price a business pays for goods it purchases to sell. (What it cost you to make or purchase the stuff you sell) Credit - An amount recorded on the right side of a T account. (A decreasing entry to record double entry bookkeeping) Current Asset - Cash and other assets expected to be exchanged for cash or consumed within a year. (Something that you own that you’ll get rid of in less than a year) Current Liabilities - Liabilities due within a short time, usually within a year. (Something that you owe that you think you can pay it back in less than a year) Customer - A person a business to whom merchandise or services are sold. (They aren’t always right) Debit - An amount recorded on the left side of a T account. (An increasing entry to record double entry bookkeeping) Declining-balance method of depreciation Multiplying the book value at the end of each fiscal period by a constant depreciation rate. (What the IRS says it’s worth divided by what the IRS says it’s life will be) Depreciation expense - The portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plant asset’s useful life. (What the IRS says you can write an asset off for that year rather than it’s full purchase price)
Distribution of net income statement – A partnership financial statement showing distribution of net income or net loss to partners. (What each partner is getting or losing out of the business)
Fiscal Period - The length of time for which a business summarizes and reports financial information. (How long you record your earnings before your suppose to stop and start over again.)
Dividends - Earnings distributed to stockholders. (The company made money, divided it up to all the people who put money in.)
Fiscal Year – 12-month accounting period (You have to stop somewhere.)
Double-entry accounting - The recording of debit and credit parts of a transaction. (To track what it is to what it’s for by increasing and decreasing.) Employee earnings record - A business form used to record details affecting payments made to an employee. (A Payroll report showing what you paid your employees.) Entry - Information for each transaction recorded in a journal. (The information that you enter in all your checks, invoices, bills, and deposits so we know what it’s for without having to guess.) Equities - Financial rights to the assets of a business. (What the business has left over and is obligated to the owners.)
General Journal - A journal with two amount columns in which all kinds of entries can be recorded. (As long as they’re legal.) General Ledger – A ledger that contains all accounts needed to prepare financial statements. (Your detailed filing cabinet with all your checks, deposits, yatta yatta in it.) Gross profit on sales - The revenue remaining after cost of merchandise (goods) sold has been deducted. (What you have left after your costs have been taken out of your income.) Income statement - A financial statement showing the revenue and expenses for a fiscal period. (The How much Money did I make, or how much money did I lose report.)
Expense - A decrease in owner’s equity resulting from the operation of a business. (What it costs you to operate.)
Interest expense - The interest accrued on money borrowed. (You didn’t have enough cash to buy it yourself, so you have to pay someone else additional money to use theirs.)
Federal Unemployment Tax - A federal tax used for state and federal administrative expenses of the unemployment program. (Never received any of this, did you?)
Interest Income – The interest earned on money loaned. (Your brother begged for money, and you said on one condition buy charging him interest.)
FICA tax – A federal tax paid by employees and employers for old-age, survivors, disability, and hospitalization insurance. (Won’t ever see any of this either.)
Inventory - The amount of goods on hand. (What ever you sell bought in excess that is sitting on your shelf.)
Laymen’s – A person not belonging to or skilled in a given profession. (Someone who doesn’t have to follow Corporate America rules to succeed because they don’t have a Phd, they also don’t spell correctly!)
Owner’s equity - The amount remaining after the value of all liabilities is subtracted from the value of all assets. (How much money your business has left only on paper after all is accounted for.)
Liability - Any amount owed by a business. (You received goods, services or money from someone and have to pay them back.)
Owner’s equity statement – A financial statement that summarizes the changes in owner’s equity during a fiscal period. (Did you take to much or put a lot in report.)
Long-term liabilities - Liabilities owed for more than one year. (You don’t think you’ll be able to pay them back right away.) Manual accounting - An accounting system in which data is recorded and reported mostly by hand. (Yuck.) Medicare - the federal health insurance program for people who have reached retirement age. (As if we’ll get this one either.) Net income - The difference between total revenue and total expenses when total revenue is greater. (After your Costs and expenses are deducted from your income, you have money left.) Net loss - The difference between total revenue and total expenses when total expenses is greater. (You didn’t do so good.) Net Earnings - The total earnings paid to an employee after payroll taxes and other deductions. (What their check is printed for when taxes are taken out.) Notes Payable - Promissory notes that a business issues to creditor. (When you sign something stating that you will pay the person back who gave it to you.) Notes receivable - Promissory notes that a business accepts from customers. (When they sign something and promise to pay you for money or goods they owe you.) 340
Partner - Each member of a partnership (Get a good contract agreement.) Partnership – A business in which two or more persons combine their assets and skills. (When you share your business and idea with more than one person.) Pay period - The period covered by a salary payment. (The amount of days you pay an employee at one time.) Payroll - The total amount earned by all employees for a pay period. (Call a payroll service!) Payroll register - A business form used to record payroll information. (A summary of how much your employees earned.) Payroll Taxes - Taxes based on the payroll of a business. (It’s what you have to pay if you have employees.) Post-closing trial balance - A trial balance prepared after the closing entries are posted. (A report your Accountant will use to double check in case they messed up.) Posting - Transferring information from a journal entry to a ledger account. (The entries your Accountant makes to your computer because you messed up.)
Proprietorship - A business owned by one person. (Freedom from having to ask someone’s permission to go home sick.)
State unemployment tax - A state tax used to pay benefits to unemployed workers. (This one is expensive in California.)
Ratio – A comparison between two numbers showing how many times one number exceeds the other. (Which ones bigger.)
Statement of stockholders’ equity – A financial statement that shows changes in a corporation’s ownership for a fiscal period. (Did you or your partners sell or buy corporate shares report.)
Retained earnings - An amount earned by a corporation and not yet distributed to stockholders. (Just a number on a piece of paper that gives the company value.) Revenue - An increase in owner’s equity resulting from the operation of a business. (What you made after all is said and done.) Reversing entry - An entry made at the beginning of one fiscal period to reverse an adjusting entry made in the previous fiscal period. (When we remove an entry posted to your books for tax breaks, and then rerecord them so that your books balance.) Salary - The money paid for employee service. Sales Tax - A State tax on a sale of merchandise or services. Schedule of accounts payable - A listing of vendor accounts, account balances, and total amount due all vendors. (A report of who you owe money too.) Schedule of accounts receivable - A listing of customer accounts, account balances, and total amount due from all customers. (A report of who owes you money.) Service business – A business that performs an activity for a fee. (You use your head or your hands to earn your money.) Social Security tax - see FICA Sole Proprietor - see proprietorship
Stockholder - An owner of one or more shares of a corporation. Straight-Line method of depreciation Charging an equal amount of depreciation expense for a plant asset in each year of useful life. (What you bought it for divided by what the IRS says its life will be) Supporting Schedule - A report prepared to give details about an item on a principal financial statement. (Proof.) T-account - An accounting device used to analyze transactions. (A line that separates debits from credits.) Temporary accounts - accounts used to accumulate information until it is transferred to the owner’s capital account. (The “I haven’t a clue where it goes account, and let the accountant fix it”.) Total earnings - The total pay due for a pay period before deductions (Gross Pay, what your employees make before you take the taxes out.) Transaction - A business activity that changes assets, liabilities, or owner’s equity. (Did you buy something, sell something or take something entry.) Trial Balance – A proof of the equality of debits and credits in a general ledger. (A condensed version of a general ledger without the detail, only the account name and total amount.) 341
Un-collectible accounts - Accounts receivable that cannot be collected. (They owe you money but will never pay you back.) Vendor - A business from which merchandise is purchased or supplies or other assets are bought. (Who you buy your stuff from.) Working Capital - The amount of total current assets less total current liabilities. (How much cash you have minus how much cash you owe equals what you have to work with.)