Accounting in Everyday Life

Whether you are managing a business or a home, accounting is an integral part of everyday life.

You look at your salary, pay the bills, and decide where else to spend your money. You also look at your pantry and take inventory of canned goods and other products before grocery shopping.

  

Two accounting statements, the balance sheet and the income statement, are valuable to understand and practice for business and home. These statements can help you know where your money is going and how to best use what you have.

The Balance Sheet is a statement of your assets and liabilities. Your home is an asset because it is worth something, and the amount you owe on it is a liability. After subtracting the cost or mortgage payments, the equity portion is what you have left in the home's value. The equity portion is also called your net worth.

In the simplest terms, income statements represent the incoming and the outgoing. The incoming are your paychecks, customer payments, or dividend and interest income. The outgoing is what it costs you to maintain your home or business: the gas, the electricity, the groceries, and the supplies used to make the product you sell or use in the service you sell. When the incoming is less than the outgoing, you are "in the red." This means you are not making a profit and have a negative net worth.

The balance sheet and the income statement are dependent on each other. On the balance sheet, there is a liability called Accounts Payable. These are bills you have to pay. When you record an accounts payable, you also record an expense. The Accounts Receivable is the money others owe you. When you record an accounts receivable, you record Income.

When your Accounts Receivable plus your net worth, or net profit, are less than your accounts payable, you again have a negative net worth.

Credits and debits can be best understood by understanding the Balance Sheet and the Income Statement. On the balance sheet, the assets are debits, and the liabilities are credits. Equity and net worth are also credits.

Income is credited on the income statement, and expenses are debited. When you record your paycheck, you debit your checking account and an asset and credit your Income. When you pay your bills, you credit your checking account and accounts payable and debit your expenses. When you balance your checkbook and have cash left over at the end of the month, this is your net worth.

Because you have cash left, the credit of the money coming in and the debit of the cash going out is a credit balance. This credit balance passes to the Balance Sheet Equity portion and reduces the liability portion. Hopefully, your assets equal liabilities, and you are "in balance."

Clear as mud?

Think of it as an X. At the top of each side of the X are the Assets and the Liability/Net Worth. Under the Assets are the Expenses; the Liability/Net Worth is the Income. The Asset side of the X is debited, and the Liability/Net Worth side is credited. The Income less the Expenses is the Net Income. A positive net income is a credit balance that moves to the balance sheet. The Assets minus the Liabilities equal the Net Equity or Net Worth.

Can't you hire someone to do this? Of course, but you need to know how much cash you have at the end of the day. When you apply for a loan, the bank looks at your net worth in this way. That is why they ask about how much you owe on your home, what investments you have, and what you owe. It helps, especially in today's economy, to understand what you have and do not have and how to manage the cash coming in to pay your expenses and have some left over.

What the payroll tax increase means to you

Now that the government has repealed the payroll tax cuts U.S. take home pay is cut by two percent. In addition, the IRS has restricted the federal income tax tables so middle-income folks may be subject to additional federal tax increases.


To reduce the strain on your income you may need to adjust your spending habits. Learn how to reduce your everyday spending with a minimal impact on your lifestyle.

Where is your money going

Managing your cash is a daunting task. Did you know the average American household spends 26 percent of earnings on housing costs and 13 percent on transportation? That means 61 percent is going somewhere, but most Americans do not know where.


The U.S. Bureau of Labor and Statistics has published information detailing how America spends its cash. Learn how to understand your spending habits and get control of your finances.

How America Spends

Benefits of Unit Cost Analysis

I worked for Monsanto in the Agricultural division as a young accounting assistant. I was transferred from corporate to agricultural, entering a whole new world. At that time, the agricultural division was the most profitable part of the organization. What made it a new world for me was that there were no computers within this accounting department.

My first responsibility was to compose the domestic gross profit statement. I asked where to find the computer so I could begin setting up the spreadsheet. My boss laughed and handed me a columnar pad with thirteen columns and a calculator.

Each month, I used a 20-pound report for each product and transferred the respective product's gross sales, freight, quantity sold, and cost-related expenses onto my paper. I calculated the sales and cost unit by product, added all the information, and produced a gross profit statement. During this process, I needed to explain why any sales or cost unit deviated from budget to $.005.

I realized I was the computer. In this accounting environment, the belief was that computers are good, but people are more intelligent. A spreadsheet can't tell you why. To know why, you must understand the nature and components of unit cost.

A unit cost reflects the costs incurred to produce, store, and sell one unit of a particular product. Unit costs include:

· Fixed costs - depreciation, monthly rents, organizational cost allocations, and any cost incurred whether or not production occurs; and
· Variable costs - labor, materials, electricity, any cost that increases or decreases depending on the output produced.

Total cost/total output equals unit cost. Total cost and total output are usually derived from a budget or forecast and can change annually, quarterly, or monthly. The static unit cost is a "best guess" based on past results used to analyze the variance between static unit cost and actual unit cost. This variance analysis creates awareness of input costs, planned output, and planned productivity.

Input costs are products and services used to create output. Examples of variances are:
· Increase/decrease in cost of material,
· Increase/decrease in freight in,
· Loss of vendor discounts,
· Missed vendor discounts.

Planned output is the estimated number of units. Examples of variances are:
· Material shortages,
· decrease in available labor,
· Equipment breakdown,
· Raw materials spillage,
· production for a customer who later canceled the order,
· Over-production based on incorrect scheduling,
· Overtime required due to unscheduled production,
· Overtime required due to a labor shortage,
· Increase/decrease in labor benefits,
· Increase in hourly wage.

Planned productivity is the number of units produced by the current employees. Examples of variances are:
· Acquisition of new machinery that is less labor intensive,
· Improvements in the production process.

A change in fixed costs can also contribute to the variance. For example,
· Change in fixed cost allocations,
· Increase/decrease in support staff costs,
· Change in monthly depreciation or rents.

Unit cost variance analysis can reveal these changes. Sometimes, poor communication results in an over or understated standard cost unit. These variances also alert management to changes that can be addressed quickly before the end of the next monthly cycle, such as addressing discounts with vendors or finding vendors to supply materials at a lower cost. A monthly cost variance analysis completed within the short closing cycle can increase profit and efficiency.

Filing Your Income Tax Doesn't Have to Be Painful

Filing your federal income tax doesn't have to be painful. The IRS offers free tax preparation software for 2024 tax filers with an adjusted gross income of $79,000 or less.

 How do you know what your adjusted gross income will be? Hey, what is adjusted gross income?

 

Adjusted gross income (AGI) is shown after subtracting all available credits from your reported income. The lower your adjusted gross income, the less tax you pay. And if your adjusted gross income is less than $49,708, you may qualify for the earned income credit, even if you don't have a child. It is an opportunity to take advantage of credits offered by the IRS. Never think that an amount is too small. On average, you save $15-$25 for every $100 of allowable deductions.

First, add up all your income documents, including self-employment, W2s, and 1099s. Then, review the available credits and subtract ballpark amounts you use to reduce your income. This will give you a rough estimate of your AGI. You can use the link at the end of this post to search for IRS-sponsored free tax software.

Adjusted Gross Income Credits:

• Educator expenses: Taxpayers can deduct $250 for each eligible educator ($500 if married filing jointly and both are educators). An eligible educator is a kindergarten through grade 12 teacher, instructor, principal, or aide who worked in a school for at least 900 hours during a school year. Qualified expenses include ordinary books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is comised in your educational field.
• Certain business expenses of reservists, performing artists, and fee-basis government officials.
• Health savings account deduction: amounts you contributed to an HSA in 2011.
• Moving expenses: If you relocated more than 50 miles from your home for your new job.  
• Deductible part of self-employment tax. 
• Self-employed SEP, SIMPLE, and qualified plans. 
• Self-employed health insurance deduction. 
• Penalty on early withdrawal of savings: If you received a form 1099-INT or 1099-OID, the penalty should be listed. 
• Alimony paid.
• IRA deduction.
• Student loan interest deduction: any interest paid when making student loan payments.
• Tuition and fees for qualified education for yourself, your spouse, or dependents.
• Domestic production activities deduction. 

If you don't have any of these credits, your AGI will be the sum of your income.

IRS free tax preparation software

QuickBooks Customer Credit/Refund Processing

Understanding customer credit/refund processing in QuickBooks is critical to maintaining the general ledger account balances and easing the burden of bank reconciliation. QuickBooks has three options to process customer credits and/or refunds:

 

1. Retain credit on the customer account for use when paying another invoice,
2. Issue a refund by check or credit card, and
3. Apply the credit to an outstanding invoice on the customer account.

Issuing credit memos for customer credit processing ensures that the original transaction is reversed properly to the accounts receivable, inventory, income and cost of goods general ledger accounts (See example). Choosing one of the three customer credit options ensures the customer is receiving the type of refund application he or she desires.

 

However, many organizations circumvent the accounts receivable refund process by setting the customer up as a vendor and issuing a refund check through the check writing option. Reimbursing a customer by writing a vendor check does not reduce the income incurred through the original invoice. This procedure leaves income is overstated by the amount of the refund. If the customer's refund check does not use the item tab, inventory will not reflect the return of the product.

 

In addition, organizations processing customer payments by credit card often misunderstand the flow of credit card receipts to the operating account. For many organizations, customer credit card payments flow directly to the operating account. When the customer credit card payments are part of the operating account, the customer refund can be issued as if it were a check. This will then be reflected in the credit card processing software maintained outside of QuickBooks. For example, using the bank's credit card processing software, a customer refund is issued to the credit card. The customer refund must also be entered using the QuickBooks customer credit processing to ensure cash and the customer account are correctly recorded. To issue the customer credit in the credit card processing software only causes cash and income to be overstated.

 

Circumventing the established QuickBooks process for handling customer refunds can cause cash to be overstated, income to be overstated, cost of goods is overstated and inventory is understated if the goods are returned. This also puts additional strain on bank reconciliation process by increasing the amount of time needed to reconcile the exceptions that occur in the credit card processing and in creating the journal entries needed to reset the general ledger accounts affected circumventing the process. 

QuickBooks Budgeting Tips

Using QuickBooks to create and monitor your annual budget is simpler than it appears. Because QuickBooks budgeting requires month-by-month entry for the annual budget users often shy away from using the budget module. However, with a few simply changes you can create a budget that works for your business, is easy to review and easy to change.

The Secret to a Painless Budget

The secret to a great budget is simplification. Do you really care about each detailed account when you are reviewing your organization's performance? Only if there is a question, and using the budget report can provide one click detail.

1. Review your chart of accounts, whether numeric or alpha. It's easier if you print a profit and loss statement and highlight the results that matter, for example, total income, total cost of goods sold, total sales expense, and total general and administrative. The goal is to budget at a high level to make monitoring performance quicker.
2. For the accounts you have marked as important, set up an account that will be the parent account, for example, payroll liabilities. The individual payroll liabilities FICA, Federal, State, State Unemployment, Worker's Compensation, etc, will become subaccounts of this parent (this becomes clearer when viewing the chart of accounts in the hierarchical view).

 Reviewing Budget Reports in QuickBooks

QuickBooks supplies basic reports for reviewing budget performance. By modifying the reports and saving them with a new name, you can control how often you review and modify your budget.

For example, using the basic QuickBooks budget report Profit & Loss Budget Performance run the report to the screen. Choose Modify Report from the menu bar. Several tabs will appear. On the Display tab, change the report range date to quarterly. To view the difference between actual and budget, on the Display tab choose show actuals and show dollar difference. To reduce the amount of data shown on the report, choose the advanced tab and choose show only rows and columns with budgets.

Entering the Budget in QuickBooks

QuickBooks budget is set up for monthly entries. If your organization generates only annual budget amounts take the annual budgeted amounts and divide the amount by twelve. Enter the monthly amount in the January field and choose "Carry this across."

To enter a budget based on quarters, individually divide each quarter by 3 and enter the correct amount for each month of the quarter.

Using QuickBooks budgeting helps businesses stay on track. You can easily see when you are compared to your budget, and what you need to change. Using the budgeting module may seem like a lot of work, but in the end, it saves time and prevents surprises.