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 coming in, 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 you go 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 understand where your money is going and how to make the best use of 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. The equity portion is what you have left in the value of the home after subtracting the cost or mortgage payments. 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 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.

On the income statement, Income is a credit, and expenses are a debit. When you record your paycheck, you debit your checking account, an asset, and you credit your Income. When you pay your bills, you credit your checking account and your 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 of the X is Credits. 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 division in the organization. What made it a new world for me is that there were no computers.

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

Each month I would use a 20-pound report for each product and transfer the respective products gross sales, freight, quantity sold and cost related expense onto my paper. I would calculate the sales and cost unit by product, add up all the information and produce a gross profit statement. During this process, I needed to clearly explain why any sales or cost unit deviated from budget down to $.005.

I realized I was the computer. In this accounting environment, the belief was that computers are good, but people are smarter. A spreadsheet can't tell you why. And to know why, you have to 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. The total cost and total output is 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 an 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. In some instances, poor communication results in a standard cost unit that is over or understated. These variances also alert management to changes that can be address 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. Monthly cost variance analysis completed within the short monthly closing cycle can lead to increased profit and efficiencies.

To help you understand unit cost, the various components, and profit implications:
The Preservation Manager's Guide to Cost Analysis
Cost Reduction Analysis: Tools and Strategies

Filing Your Income Tax Doesn't Have to Be Painful

Filing your federal income tax doesn't have to be painful. The IRS has downloadable free tax preparation software for tax filers who have an adjusted gross income of $57,000 or less. How to you know what your adjusted gross income will be? Hey, what is adjusted gross income?

Adjusted gross income (AGI) is the amount of income you have minus the credits available. 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 the 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 one that is common and accepted 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.

If you have any specific questions, please leave a comment and I will answer the question so others can benefit.

IRS free tax preparation software

Unemployment Conversations-Are They Right

The unemployment conversations tend to focus on older workers, duration of unemployment, and professions. But are they right? The unemployment numbers for December 2011 have been crunched and published by the Bureau of Labor Statistics, U.S. Department of Labor. While the results are unremarkable in that they confirm that unemployment is still too high, hovering around 8.5%, drilling down reveals a different unemployment conversation than is currently circling the Internet.

When looking at the unemployment percentages by age group, those ages 25-34 are the highest group of unemployed at 24.4%. The unemployed workers 55 and over constitute 14.7% of the unemployed, with the remaining age groups 20-24, 35-44, and 45-54 hovering at 17%. This changes the conversation in terms of "older workers" that range from 40 and over to 55 and over depending on what you read. This suggests that employers are actually more receptive to "older" workers than the hype would have us believe.

There is concern over the recent revelations that employers are considering those who have been unemployed for more than six months undesirable. Unfortunately, the report does not present a breakdown by age for the duration of unemployment. What the report shows is that 44.5% of those actively collecting unemployment have been active for 27 or more weeks.

The highest areas of unemployment are construction at 16%, professional and business services at 9.3%, and leisure and hospitality at 10.8%. The lowest areas of unemployment are government workers at 4.1%, education and health services at 5.5%, financial services at 5.6% and mining at 6.9%.

The percentages are based on the number of unemployed persons as of December 2011. This number adjusts for those not actively seeking work and those who are institutionalized. The remaining unemployed population is 13,097,000. Of this number, the greatest population of unemployed is the age group 25-34. Over the flip side, of the 140,681,000 employed in the labor force the highest percentage of employment is seen in the 45-54 age group.

The conversations can change towards older workers that are the largest percentage of the employed work force and have lower unemployment ratios than their younger counterparts. Long-term unemployment is a chronic condition at this stage in the economy not limited to age. Education and health are indeed fields to explore. The unemployment in construction is a real key for economic growth.

Bureau of Labor Statistics-The Employment Situation December 2011

Which Version of QuickBooks Accounting Software is Right for Your Business

Is QuickBooks accounting software right for your business? QuickBooks offers a range of products for use in desktop, server and on-line accounting environments. QuickBooks signature is ease of use and behind the scenes accounting that occurs as users enter transactions for accounts payable, sales and accounts receivable, payroll processing and inventory management. QuickBooks accounting software includes industry specific forms and general ledger accounts ranging from 65 industries (QuickBooks Online) to more than 150 industries (Enterprise).

Evaluating QuickBooks Accounting Software provides a detailed look at the accounting functions available in each version of QuickBooks and an overview of the pros and cons of using QuickBooks accounting for your business.