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.

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.

 

Payroll Liabilities

Payroll is perplexing. It would seem straightforward enough, but if you offer health, dental or retirement benefits to your employees, the calculations become more complicated. And how can you be sure you are doing it correctly?

Maybe you outsource your payroll. You should still perform a verification calculation to make sure your service is correct. As an employer, it is your liability.

Maybe you are using your accounting software for payroll. Do you know how to set up the payroll module to perform the correct calculations?

Simple explanation of payroll calculations.

Independent Contractors How to calculate taxes

If you have your own small business and offer services, you could be an independent contractor. Before the end of 2009, calculate what your personal income tax will be. If you have not made tax deposits, it's a good idea to make personal federal tax deposits before December 31st to avoid any penalties.

Calculate the tax due on contract work

Get Your Business Out of Debt

If your business profit is on the downward path, review the key elements of your financial information. Review your Accounts Receivable for slow pays. Look over your vendor month end statements for invoices you already paid, or duplicate bills.

Review your selling, and administrative costs. Look at the details. You'd be surprised how much you can save with a simple analysis of your business expenses.

For information and a detailed guide, How to Get Your Small Business Out of Debt provides a detailed step by step program to get your business out of debt.

QuickBooks Easy to Use Easy to Misuse

QuickBooks for accounting and business is very friendly. Setups are done with walk-through promts. The HELP funtion is easy to read. But sometimes difficult to navigate.

QuickBooks promotes this product as user-friendly, and it is, for standard accounting functions. When using the more complicated functions for inventory, it's important to spend some time reading the HELP articles to understand the logic of QuickBooks. Each module, such as Accounts Receivable, Sales Orders, and Inventory, are dependent on the proper setup.

There are also some problems users don't pick up on until it's too late. For a summary of the common problems and solutions, review my article QuickBooks Problems.

If you have any questions, please email me, using the form on the website Penstruckbiz.com. I will be happy to help you.

Why get a financial statement audit

Has your bank or another creditor asked you for a set of audited financial statements? Ever wonder why?

When you contract a CPA to audit your statements, the CPA firm tests for proper accounting practice. They also test to make sure all of the transactions are recorded. Then they issue a letter, which is an attestation, which says whether your current practices are in line with GAAP.



To find out more about financial statement objective, read Objectives of a Financial Statement Audit.

Small Business-Ways to Cut Costs

Electricity

This is an easy, simple fix. Turn it off. At their desk, employees have a radio or CD player, a fan, a heater, a computer, and other office equipment, like calculators and printers. Require employees to turn these off each evening.
If you don’t run a second or third shift, power down machinery each night. It is less expensive to bring an employee in 15 minutes before start to power these up.
When replacing equipment, purchase energy efficient. Use copy machines, monitors and faxes that power down when not in use.

Purchases

Analyze who you spend the most with, and ask for a discount. While inventory controls may only want to stock immediate use, if you have the space, buying in bulk can save money.
Take advantage of all discounts vendors offer. Pay your bills on time. This can improve your credit rating and your business financing rates.

Paper and Printing

These are necessary costs for business. I don’t advocate re-using paper in printers, as this reduces the life of the printers, due to ink buildup and debris. But I do suggest that you use recycled toner and ink cartridges. You may have to try one or two providers, but recycled cartridges produce excellent quality.
Shop paper. Choose four paper providers and get quotes. The larger providers will allow you to place an annual order at a reduced price, and warehouse the paper for you.

Employee Costs

Employee costs are always an issue. As you seek ways to reduce these costs, keep in mind that benefits are a big part of an employee’s choice to stay. With the skyrocketing costs of health insurance, it may be wise to ask the employee to contribute a larger portion to retain benefits.
Take advantage of state probationary periods for new employees. Most states have a 28-day policy, where these employees are reported quarterly and receive a lower unemployment rate. You will know within 27 days whether the employee will work out or not, don’t pay higher rates.

Credit Cards and Travel

Establish limits and accountability for company credit cards. Be vigilant. Set up a travel policy based on the IRS current per diem rates. These are the reasonable food and lodging costs of a day’s travel. While employers want to make travelers comfortable and happy, they don’t want to pay for mini vacations.

Business Insurance

Shop this insurance at each renewal date. Even if you have a broker, shop some on your won. Remember, brokers make commissions from their recommendations.

Be Creative

Based on your specific business needs, brainstorm ways to save costs. You may be able to move to 10 hours days four days a week, and save a day of electricity, paper and printing, and more. There may be a scheduling method of production that is more cost efficient. There are possibilities.

To learn more, see my article on Helium. http://www.helium.com/items/1463052-cost-control

Simple Financial Statements for Small Business

So, you are running your small business. It takes a lot of time and effort to market and retain customers. You may spend hours promoting your blog or website. There are products to ship, inventory to purchase and bills to pay. Why are financial statements necessary? There is money in your bank, so you know your making some.

Financial statements show the health of your business. Financial statements are made up of a Balance Sheet, Income Statement, and a Cash Flow Statement. The Balance Sheet shows your assets, what you own, and Liabilities, what you owe. The Income Statement gives you monthly and year-to-date information on Sales, Cost of Product or Service, and the expenses incurred in operating your business. The Cash Flow Statement shows where the money went.

Instead of throwing your receipts into a box or drawer, and paying your accountant to sort these out at tax time, save yourself some money and begin simple methods of keeping track yourself. You can purchase accounting software, such as QuickBooks, which is very easy to use and does a lot of the work for you. Or, you can set up a spreadsheet to track sales, costs and expenses. You can even use a notebook to write these down. Whichever method you choose, it will help you make sure you are being paid by all your customers, and paying your expenses on time. QuickBooks even does payroll, so you don’t have to figure this by hand.

To get a better understanding of financial statement concepts, and how to prepare them, please refer to my article “How to Prepare Financial Statements”. http://www.helium.com/items/1500362-making-financial-statements

This will give you step-by-step instructions on preparing the Balance Sheet, Income Statement and Cash Flow Statement. It also explains what makes up the items on each financial statement, and how they relate.