Where Does the Money Go? Paybacks vs. Expenses

You’ve helped your business survive the startup or difficult times and before you knew it, you’ve loaned thousands of dollars to your company and it’s finally paid off, literally. It’s payback time. Whether your company is reimbursing you in a lump sum or dribs and drabs, every dollar needs to be allocated. And, if accounting is not properly managed, it often leads to a string of misallocations on the books.

This is a common scenario: Upon receipt of the funds loaned to the company, the company will deposit and inadvertently post the transaction to an income account. The cash is then utilized for various expenses and liabilities and posted as such.

The next step – the payback. In the minds of the lender, a.k.a. owner, and the recipient, the loan’s purpose was to keep the company afloat; in other words, to pay necessary expenses to keep the doors open. More often than not, a disbursement made to reimburse the owner will then be incorrectly expensed to an account of choosing, usually miscellaneous which should be avoided as much as possible. These transactions create a domino effect of, to put it bluntly, a mess!

The loan was booked to income which not only creates a bogus gross profit but also increases the company’s tax liability. The payback was expensed which not only duplicates expenses previously recorded (roughly) but also may also lead to problems on the owner’s personal tax return.

To avoid misallocations that are time-consuming to investigate and adjust later, create a loan payable account to correctly reflect the original loan transaction. As funds are slowly paid back to the lender, the balance on this liability account will work its way down. At inception, when the funds are deposited into the checking account, the cash is treated like any other transaction when used. It’s expensed or posted to a liability account and business is run as usual.

No payments to the lender/owner are expensed whether the funds were used for phone bills, payroll, or staff lunches. These items have already been expensed in real-time and expensing again is double-dipping, (i.e., creating bogus expenses to the company’s profit and loss statement).

The aforementioned transactions need extra care and attention. They exceed basic data entry of everyday receivables and payables. Be selective in who manages your accounting and try to keep it to one person. A good practice is to have a month-end close which will provide the opportunity for reconciliations, corrections, and analysis of your financial statements.

If you stay on top of your monthly activity, your year-end will be quick and painless!

Did your Small Business Earn too Much?

When using QuickBooks, a common misconception is an income account that appears too high. In most cases, the total is twice the amount of what it should be. Upon review and a thorough reconciliation, usually at month-end, a trail of duplicate entries is discovered.

New users to QuickBooks will likely be creating unintentional duplicate postings. This involves processing two different transactions to record income on two separate occasions. In so doing, accounts receivables may also be carrying higher balances than forecasted.

The first transaction to increase the income account is in creating a customer invoice. This entry increases the customer balance (accounts receivable) while simultaneously increasing the income account. The duplicate entry arises when payment is received from the customer at a later date.

A common error is the payment will be posted directly into the bank account rather than applied to the customer’s open invoice. Typically, a debit is posted to the bank account and a credit is posted to the income account thereby creating a duplicate entry to income. While doubling up on income, the customer’s invoice is left unpaid.

To post the transaction correctly, the payment needs to be recorded directly into the customer’s ledger. And depending on how many checks will be included on the deposit slip, the user may select one of two choices in the next step of the transaction.

If you have only one check, under the “deposit” pull-down menu in the customer ledger screen, select the bank account to which the deposit will be made. This will complete the transaction. The income account will not be changed, the bank account will be increased, and accounts receivable will be decreased leaving the invoice for the customer marked paid. The transaction is complete.

If multiple checks are being prepared for the deposit slip, select “undeposited funds” from the pull-down menu. This will allow QuickBooks to calculate the final total of the deposit in the following step allowing for a more accurate bank reconciliation.

Lastly when all payments are properly applied to the corresponding customers, under the “banking” pull-down menu from the home screen, select “make deposits.” A list of all the payments entered will appear. Select all payments included on the deposit slip and collectively deposit into the proper bank account. This transaction will transfer all ‘undeposited funds” to the selected bank account and complete the transaction.

Receiving and recording payments by following the steps above leave the income account unchanged and credit the customer balance(s) providing an accurate balance of accounts receivables in the process.

The importance of a thorough month-end reconciliation can never be stressed enough as your small business progresses throughout the year. And attention to the smallest of details will ensure accuracy of your financial statements.

Recording Expenses: Credit Card Statements vs. Credit Card Transactions

When handling credit card payments using QuickBooks, small business owners may question the difference between entering a monthly credit card statement as a bill and recording credit card transactions in real time.

Entering a monthly statement as a bill involves creating your credit card provider as a vendor. Upon receipt, the bill is entered under the vendor center pulldown menu using the statement date. The total due is recorded, after which, an option to split expenses is provided (for use with multiple transactions and expenses). Interest charges are also recorded and a payment is scheduled. A full or partial payment can be made however, when entering future bills, the user must be mindful not to enter previous unpaid balances which would result in overpayments.

When recording a bill, if a statement period’s beginning and ending dates fall in the middle of the month, the billing date combines the total charges of two months of activity. Therefore, actual expenses for the calendar month are not reported accurately.

Entering individual transactions as credit card purchases in real time is done throughout the month. Transactions are expensed as of the date of the receipt of purchase. This process is more accurate for month-end financial reporting and allows for monthly statement reconciliations.

Recording your credit card activity as it happens involves creating your credit card account as a credit card in the chart of accounts versus creating it as a vendor in the vendor list. A running balance will show on the balance sheet and will decrease when payments are applied to the credit card account.

In addition to more accurate reporting, a credit card account can be reconciled upon receipt of the monthly statement. This is done in the same manner a bank statement is reconciled by accessing the credit card register and choosing the option to reconcile. Here, interest charges are entered and a payment date is scheduled. Any returns or credits are also confirmed as processed by the vendor.

Either way expenses are recorded and payments are processed. When recording credit card transactions, your best bet is to show your credit card as a credit card on your balance sheet. This provides an accurate snapshot of your financial statements and tracks all monthly activity.

In this author’s opinion if a reconciliation is ever possible, especially if multiple company credit cards issued, choose to do so. A double-check on where your money is going is always in a small business owner’s best interest.

The Habit of Hiring Contractors

It’s that time. Small business owners are scrambling to gather their paperwork in preparation for tax season. If you wear several hats in your business, you’re one of many who may be feeling overwhelmed in meeting the multitude of deadlines we’re all facing. In these challenging first months of the new year, it may be a good idea to take the time to make room for improvements now as you discover where you went wrong in the prior year.

One common oversight in the small business is neglecting to process the proper paperwork in anticipation for reporting 1099-Misc forms at year-end. If you’ve hired subcontractors, or independent contractors, throughout the calendar year and have no W-9 Form (requests for tax payer identification number) for them on file, you may find yourself making last-minute requests for information to get 1099-Misc Forms out the door.

A good habit to practice is to have the W-9 completed upon agreement of the contract for employment and prior to commencement of work. Taking it further, if you utilize an accounting software program such as QuickBooks, entering their information and denoting their vendor profile as “1099 eligible” will make the year-end process for outside service providers seamless.

Lastly, keep all W-9 Forms for a minimum of 4 years for IRS purposes. If you rehire the contractor, be sure all information is current, including the mailing address to ensure the recipient receives his/her copies of the 1099-Misc Form.

Click the following  link for a printable W-9 Form:

https://www.irs.gov/pub/irs-pdf/fw9.pdf

 

Non-Employee Compensation

If your business paid an outside service provider $600 or more during the calendar year of 2016 and they require a 1099-MISC Form, it is due to the recipient of compensation on January 31, 2017. Reporting of Box 7 (non-employee compensation) on this form, is also due to the IRS on January 31, 2017.

Other payments reported on 1099- MISC, excluding Box 7, are due to the IRS with transmittal Form 1096 by February 28, 2017.

Click the following link for more information: https://www.irs.gov/pub/irs-pdf/p509.pdf

Wage Increase Alert- Quick Tip

Happy New Year! And with the new year’s arrival comes a quick tip – Massachusetts’ minimum wage has increased to $11.00 per hour as of 1/1/2017. With the holidays officially over and most businesses now running fully staffed and back into the swing of things, remember to adjust your employees’ wages accordingly.

See the link below for more information including wage rates for service and agricultural industries.

http://www.mass.gov/lwd/docs/dol/public-message-explaining-mw-increases-effective-1-1-17.pdf

 

 

 

Bank Discrepancies (Reconciling vs. Plugging)

With an abundance of accounting software available to today’s entrepreneur, the advantage of an automated system may, at times, be too user-friendly. Credence is given to the application to keep the books as a user chooses to allow the program to correct any discrepancies as in this illustration of a routine bank reconciliation.

After completing a reconciliation, if the ending balance is off, an adjustment may be generated to fix, or plug, the numbers to balance. No research is done as to why the numbers don’t jive. It is assumed the bank’s balance is correct.

The importance of investigating any discrepancy, however big or small, cannot be underestimated. The following scenarios, of which there are many, may apply:

Cash Overage: A bank statement may show a deposit credited to your account but it’s mysteriously missing from transactions you’ve recorded. With a little digging, you may find the cash receipt(s) was never entered. For the customer(s) to receive proper credit, a manual correction is necessary rather than an automated adjustment. Another possibility may be the bank had posted the deposit to your account in error. The bank will need to be notified for this to be reversed.

Cash Shortage: The opposite of the previous example in that you made a deposit but it’s not showing up on the bank statement. Mistakes happen and human error occasionally slips in where a teller may press one wrong number landing your money in someone else’s account. A quick phone call to the bank will verify all was done correctly if you’ve kept your deposit receipt.

This could also mean the deposit never made it to the bank so it’s worth the effort to research the transaction rather than letting it go. Note, if the deposit was made just before the statement’s cutoff date, it’s likely to appear on following month’s statement.

Uncleared Checks: A few stragglers repeatedly show up in your “uncleared items” list after each reconciliation. Now you are the customer and uncleared checks equate to late payments. If you see a check that hasn’t cleared for an extended period, consider stopping payment and reissuing the check.

Another common error occurs when recording transactions from sales receipts. A credit card receipt may be mistaken for a debit card receipt. Instead of posting the transaction to a credit card register, it’s been entered into a check register. A quick retrieval of the receipt will confirm the transaction.

Credit Card Reconciliations: Many choose not to reconcile a credit card statement. Instead, the statement is entered as a bill. But reconciling a credit card statement is equally important.

A reconciliation will monitor any returns/refunds confirming that all transactions have been properly credited to your account. You’ll confirm that your last payment was received and last, but furthest from least, you’ll ensure that no unauthorized charges have taken place.

As menial as monthly reconciliations may seem, thanks to automated systems, the urgency of diligently and accurately processing them will remove any red flags from your cash flow. Having transactions cleared keeps the books clean and all questions answered.

One Entity – Multiple Bank Accounts

New small business owners who are gearing up to get organized and put their best foot forward in a new business venture encounter many daunting tasks in the first few months of business operations. Once settled in, most are ready to dive into an official method of accounting rather than a handwritten check register with an envelope full of receipts to serve as backup for future tax returns. However, some are unfamiliar with the basics of setting up their accounting system and common questions prior to taking on the task are, “What if I have two checking accounts? Do I need to split things up for my tax filings?”

Many business owners opt for two (or more) checking accounts and, perhaps, a savings or reserve account. Reasons for this vary and are the prerogative of the owner. But a common choice is utilizing a second checking account for payroll expenses only.

The business entity may have multiple bank accounts listed as assets on its balance sheet. And all cash transactions will run through one set of financial statements. These transactions will contribute to tax filings under one tax identification number. Therefore, there is no need to “split things up.” One entity is accruing all income and expenses regardless of the number of bank accounts holding funds.

Multiple bank accounts do not equate to a more complicated accounting process nor do they complicate your tax filings. What may seem superfluous for one, may simplify the process for another. The best choice is to fund your business in a way that works efficiently for you.

Recording Payroll and the Importance of Time

A small business will often employ an outside payroll service to execute their payroll and all that it encompasses including filing the required federal and state payroll reports and making tax payments. If your business opts for an outside service, you may be familiar with the reports submitted to you upon completion of your periodic payroll. But, as you know, the procedure doesn’t stop there. Accounting must then be completed.

The reports contain all details for each paycheck, tax liabilities, and payroll fees for the period; all of which become part of the company’s financial statements. However, a common occurrence for the busy owner who wears many hats is just giving the reports a quick glance to confirm the operating fund has the cash requirements to cover the scheduled deductions. The reports are then set aside for a thorough review at a later date. The problem that arises is just that – the later date.

A frequent mistake when recording the payroll out of period is taking a shortcut by making a lump sum entry and ignoring individual paychecks and their actual dates. This is especially true when a company consists of a high number of employees as doing so will save time in bookkeeping tasks that have already fallen behind. Unfortunately, this method will not only create a headache when reconciling your bank statement, but will also create inaccurate tax liabilities and expenses which will lead to bigger issues at year-end.

Reconciling to the payroll reports each pay period is crucial for expenses and liabilities to be 100% accurate. To accomplish this, record actual gross wages and accrue tax liabilities in real time. In so doing, data will be contributed for processing of annual tax returns throughout the year.

This is a bookkeeping task that needs prompt attention and one more way to save money. Your tax accountant will earn more billable time with other clients!

Get the Memo and Track your Cash

How many times have you written a check payable to cash or used cash as a form of payment? Although ill-advised due to security and tracking issues, it’s a transaction that happens more often than one would think in business practice. Whether you, a member of your staff, or an outside source is the recipient of the funds, a recording of the transaction must follow.

The reasons for a cash transaction vary and are unexplored here but it’s often simply requested by the service provider. However, the delivery of a cash payment is one of which to take note. In other words, write yourself a memo.

In all financial matters, whether using cash for your own business expense or a payment to a vendor, be sure to jot down a quick memo on the check, (or if using actual cash, a post it, or a napkin, or anything to help you remember), and record the transaction promptly. If possible, obtain a receipt and attach it to a copy of your cancelled check for proof of payment. Allocate the payment accordingly to track budgeted line items, reconciling of bank statements, and tax deductions.

Remember, your bottom line is your ultimate goal and every transaction contributes to your company’s financial statements. A quick memo will encourage you to take the transaction to completion and avoid unexplained and miscellaneous transactions in your business operations.