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.