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!

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!