As a business owner, you should deposit all business receipts in a separate bank account. If possible, you should also make all disbursements by check. In regard to all business entities, with the exception of corporations, a disbursement from the business account is not necessary to qualify the expenditure as a business expense. A check written on a personal account for business purposes will qualify if that expense is otherwise allowable. It is important to document both business income and business expenses.
Write checks payable to yourself only when making withdrawals of income from your business for your own use. Avoid writing business checks payable to cash as it is important to identify which disbursements are business and which are personal. In the event of an IRS audit, this is an area that will get close scrutiny. The IRS auditor will not only look at each check to see to whom it was paid, but will also look at the reverse of the check to see by whom and how the check was endorsed. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt or a cash payment, put a statement in your records at the time of the transaction to explain the payment.
Get receipts for all business expenditures. For all business trips, make sure always to get receipts from hotels and motels. Toll receipts can also help to substantiate travel expenses. Obtain receipts from the post office when you purchase stamps and mail larger envelopes and packages. You should establish a petty cash fund for small expenses. All business expenses paid by cash should be clearly substantiated by documents showing their business purpose.
Support your entries with sales slips, invoices, canceled checks, paid bills, duplicate deposit slips, and any other documents that explain and support entries made in your books. File these materials in a safe place. Memorandums or sketchy records that approximate income, deductions, or other items affecting your tax liability will not be considered adequate by the IRS. Remember, where the IRS is concerned, the burden of proof is on the taxpayer. You will not be given the benefit of the doubt.
Classify your accounts by separating them into five groups:
1. Income
2. Expenses
3. Assets
4. Liabilities
5. Equity (net worth).
For your assets, record the date of acquisition, cost or other basis, depreciation, depletion, and anything else affecting their basis. Basis is the amount of your investment in a property for tax purposes.
Keeping Records: You must keep the books and records of your business available at all times for inspection by the IRS. Records must be kept as long as they may be needed in the administration of any Internal Revenue law. Keep records supporting items reported on a tax return until the period of limitations for that tax year has expired. Usually, this is the later of:
1. Three years after the date your return is due or filed; or
2. Two years after the date the tax was paid.
However, you should keep some records indefinitely. For example, if you adopt the last-in first-out (LIFO) method of valuing your inventory or change your accounting method, records supporting these decisions and approvals from the IRS may be needed for an indefinite time.
You should also keep records that support your basis in property for as long as they are needed to figure the correct basis of your original or replacement property (including capital improvements). Keep copies of your tax returns. They will help you in preparing future tax returns and in making computations if you later file an amended return or a claim for a refund.
Using Microfilm For Recordkeeping: Microfilm and microfiche reproductions of general books of accounts (such as cash books, journals, voucher registers, and ledgers) are accepted by the IRS for recordkeeping purposes if they comply. If your micrographic system does not meet the requirements of Revenue Procedure 81-46, you may be subject to penalties.
Using Computerized Recordkeeping: If you maintain your records with an automated data processing system, you must be able to produce legible records from the system to provide the information needed to determine your correct tax liability. You must keep a complete description of the computerized portion of your accounting system. This documentation must be sufficiently detailed to show the applications being performed; the procedures used in each application; or the controls used to ensure accurate and reliable processing; and controls used to prevent the unauthorized addition, alteration, or deletion of retained records. These records must be retained for as long as they may be material in the administration of any Internal Revenue law.
Jumat, 20 Januari 2012
The Truth About Using A Computerized Accounting System
There are many versions of accounting software available to small business owners, but accounting is only one aspect of recordkeeping. Word processors, databases, spreadsheets, and all sorts of graphics can aid you in managing the financial and clerical aspects of your business.
There is probably no area of greater confusion to the self-employed businessperson than the true costs and benefits of installing and using a computerized accounting system. Such business owners frequently have an inflated picture of the benefits of computerized accounting and an incomplete understanding of the costs. Some computer resellers and systems installers are unwilling to point out these conceptual errors, which often results in some unpleasant surprises and bad feelings.
First and foremost, computerized accounting is not simpler than manual accounting. Even the very best accounting system will not magically convert a clerk into a bookkeeper. In fact, many full-charge bookkeepers insist that computerized accounting requires sharper bookkeeping skills than a manual system. Manual systems generally break tasks down into simple steps. Errors are not automatically carried into other accounts. Second, if you are going to bring your accounting in-house, you need to realize that a computerized accounting system is not going to straighten out a manual accounting mess. Small, rapidly growing businesses, faced with limited capital and cramped cash flows, often put off establishing proper accounting procedures until a sunnier day. A manual accounting system verging on a bad dream can become an almost impossible nightmare when computerized. To "go onto" a computerized accounting system, your books have to be in perfect order. Accounts receivable and payable have to be exact and up-to-date, and beginning balances must be accurate.
Moreover, where staff is already stretched, part-time help may be required, because the two systems should be run in parallel for at least two months. In this way, mistakes are more easily caught and corrected and the business need not rely on the new system to provide accurate data. Your staff simply must have time to learn the new system. Expect three to six months to return to earlier efficiency. The system you purchase will not do everything exactly as you want it. Some modifications may be needed to produce the output you need; these won't be free. Plan on involving an accountant in this task. Don't expect the package seller to provide advice only an accountant should provide. And some tasks simply do not lend themselves to easy, efficient transfer to computers. Computers are only tools.
Finally, let's look at the support issue. Support includes all the services necessary to get and keep your computer system up and running and as productive as possible. These services include instruction, education and maintenance both under warranty and other. Some resellers include preventive maintenance to service your computer before it stops working. The accounting package reseller probably captures a gross margin of 20 percent to 40 percent of the accounting package retail price. Out of that margin, sales commissions and all overhead expenses must be paid. Most support requires not only a thorough knowledge of the package, but a sound grounding in standard accounting procedures. Well-trained and equipped support personnel normally need to charge at least $60 to $75 per hour to make a reasonable profit. Therefore, on average, one should probably not expect more than one hour of qualified support "free" for each $1,000 of purchase price. Free, unqualified support generally costs you more than you can afford.
There is probably no area of greater confusion to the self-employed businessperson than the true costs and benefits of installing and using a computerized accounting system. Such business owners frequently have an inflated picture of the benefits of computerized accounting and an incomplete understanding of the costs. Some computer resellers and systems installers are unwilling to point out these conceptual errors, which often results in some unpleasant surprises and bad feelings.
First and foremost, computerized accounting is not simpler than manual accounting. Even the very best accounting system will not magically convert a clerk into a bookkeeper. In fact, many full-charge bookkeepers insist that computerized accounting requires sharper bookkeeping skills than a manual system. Manual systems generally break tasks down into simple steps. Errors are not automatically carried into other accounts. Second, if you are going to bring your accounting in-house, you need to realize that a computerized accounting system is not going to straighten out a manual accounting mess. Small, rapidly growing businesses, faced with limited capital and cramped cash flows, often put off establishing proper accounting procedures until a sunnier day. A manual accounting system verging on a bad dream can become an almost impossible nightmare when computerized. To "go onto" a computerized accounting system, your books have to be in perfect order. Accounts receivable and payable have to be exact and up-to-date, and beginning balances must be accurate.
Moreover, where staff is already stretched, part-time help may be required, because the two systems should be run in parallel for at least two months. In this way, mistakes are more easily caught and corrected and the business need not rely on the new system to provide accurate data. Your staff simply must have time to learn the new system. Expect three to six months to return to earlier efficiency. The system you purchase will not do everything exactly as you want it. Some modifications may be needed to produce the output you need; these won't be free. Plan on involving an accountant in this task. Don't expect the package seller to provide advice only an accountant should provide. And some tasks simply do not lend themselves to easy, efficient transfer to computers. Computers are only tools.
Finally, let's look at the support issue. Support includes all the services necessary to get and keep your computer system up and running and as productive as possible. These services include instruction, education and maintenance both under warranty and other. Some resellers include preventive maintenance to service your computer before it stops working. The accounting package reseller probably captures a gross margin of 20 percent to 40 percent of the accounting package retail price. Out of that margin, sales commissions and all overhead expenses must be paid. Most support requires not only a thorough knowledge of the package, but a sound grounding in standard accounting procedures. Well-trained and equipped support personnel normally need to charge at least $60 to $75 per hour to make a reasonable profit. Therefore, on average, one should probably not expect more than one hour of qualified support "free" for each $1,000 of purchase price. Free, unqualified support generally costs you more than you can afford.
Accounting: Understanding Your Assets
Current assets are the key assets that your business uses up during a 12-month period and will likely not be there the next year. The accounts that reflect current & long-term assets are:
Cash in Checking: Any company's primary account is the checking account used for operating activities. This is the account used to deposit revenues and pay expenses. Some companies have more than one operating account in this category; for example, a company with many divisions may have an operating account for each division.
Cash in Savings: This account is used for surplus cash. Any cash for which there is no immediate plan is deposited in an interest-earning savings account so that it can at least earn interest while the company decides what to do with it.
Cash on Hand: This account is used to track any cash kept at retail stores or in the office. In retail stores, cash must be kept in registers in order to provide change to customers. In the office, petty cash is often kept around for immediate cash needs that pop up from time to time. This account helps you keep track of the cash held outside a financial institution.
Accounts Receivable: If you offer your products or services to customers on store credit (meaning your store credit system), then you need this account to track the customers who buy on your dime. Accounts Receivable isn't used to track purchases made on other types of credit cards because your business gets paid directly by banks, not customers, when other credit cards are used.
Inventory: This account tracks the products you have on hand to sell to your customers. The value of the assets in this account varies depending upon the way you decide to track the flow of inventory into and out of the business.
Vehicles: This account tracks any cars, trucks, or other vehicles owned by the business. The initial value of any vehicle is listed in this account based on the total cost paid to put the vehicle in service. Sometimes this value is more than the purchase price if additions were needed to make the vehicle usable for the particular type of business. For example, if a business provides transportation for the handicapped and must add additional equipment to a vehicle in order to serve the needs of its customers, that additional equipment is added to the value of the vehicle. Vehicles also depreciate through their useful lifespan.
Accumulated Depreciation Vehicles: This account tracks the depreciation of all vehicles owned by the company.
Furniture and Fixtures: This account tracks any furniture or fixtures purchased for use in the business. The account includes the value of all chairs, desks, store fixtures, and shelving needed to operate the business. The value of the furniture and fixtures in this account is based on the cost of purchasing these items. These items are depreciated during their useful lifespan.
Accumulated Depreciation Furniture and Fixtures: This account tracks the accumulated depreciation of all furniture and fixtures.
Equipment: This account tracks equipment that was purchased for use for more than one year, such as computers, copiers, tools, and cash registers. The value of the equipment is based on the cost to purchase these items. Equipment is also depreciated to show that over time it gets used up and must be replaced.
Cash in Checking: Any company's primary account is the checking account used for operating activities. This is the account used to deposit revenues and pay expenses. Some companies have more than one operating account in this category; for example, a company with many divisions may have an operating account for each division.
Cash in Savings: This account is used for surplus cash. Any cash for which there is no immediate plan is deposited in an interest-earning savings account so that it can at least earn interest while the company decides what to do with it.
Cash on Hand: This account is used to track any cash kept at retail stores or in the office. In retail stores, cash must be kept in registers in order to provide change to customers. In the office, petty cash is often kept around for immediate cash needs that pop up from time to time. This account helps you keep track of the cash held outside a financial institution.
Accounts Receivable: If you offer your products or services to customers on store credit (meaning your store credit system), then you need this account to track the customers who buy on your dime. Accounts Receivable isn't used to track purchases made on other types of credit cards because your business gets paid directly by banks, not customers, when other credit cards are used.
Inventory: This account tracks the products you have on hand to sell to your customers. The value of the assets in this account varies depending upon the way you decide to track the flow of inventory into and out of the business.
Vehicles: This account tracks any cars, trucks, or other vehicles owned by the business. The initial value of any vehicle is listed in this account based on the total cost paid to put the vehicle in service. Sometimes this value is more than the purchase price if additions were needed to make the vehicle usable for the particular type of business. For example, if a business provides transportation for the handicapped and must add additional equipment to a vehicle in order to serve the needs of its customers, that additional equipment is added to the value of the vehicle. Vehicles also depreciate through their useful lifespan.
Accumulated Depreciation Vehicles: This account tracks the depreciation of all vehicles owned by the company.
Furniture and Fixtures: This account tracks any furniture or fixtures purchased for use in the business. The account includes the value of all chairs, desks, store fixtures, and shelving needed to operate the business. The value of the furniture and fixtures in this account is based on the cost of purchasing these items. These items are depreciated during their useful lifespan.
Accumulated Depreciation Furniture and Fixtures: This account tracks the accumulated depreciation of all furniture and fixtures.
Equipment: This account tracks equipment that was purchased for use for more than one year, such as computers, copiers, tools, and cash registers. The value of the equipment is based on the cost to purchase these items. Equipment is also depreciated to show that over time it gets used up and must be replaced.
Business Owners: How To Keep Your Books Ready For The IRS
As a business owner, you should deposit all business receipts in a separate bank account. If possible, you should also make all disbursements by check. In regard to all business entities, with the exception of corporations, a disbursement from the business account is not necessary to qualify the expenditure as a business expense. A check written on a personal account for business purposes will qualify if that expense is otherwise allowable. It is important to document both business income and business expenses.
Write checks payable to yourself only when making withdrawals of income from your business for your own use. Avoid writing business checks payable to cash as it is important to identify which disbursements are business and which are personal. In the event of an IRS audit, this is an area that will get close scrutiny. The IRS auditor will not only look at each check to see to whom it was paid, but will also look at the reverse of the check to see by whom and how the check was endorsed. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt or a cash payment, put a statement in your records at the time of the transaction to explain the payment.
Get receipts for all business expenditures. For all business trips, make sure always to get receipts from hotels and motels. Toll receipts can also help to substantiate travel expenses. Obtain receipts from the post office when you purchase stamps and mail larger envelopes and packages. You should establish a petty cash fund for small expenses. All business expenses paid by cash should be clearly substantiated by documents showing their business purpose.
Support your entries with sales slips, invoices, canceled checks, paid bills, duplicate deposit slips, and any other documents that explain and support entries made in your books. File these materials in a safe place. Memorandums or sketchy records that approximate income, deductions, or other items affecting your tax liability will not be considered adequate by the IRS. Remember, where the IRS is concerned, the burden of proof is on the taxpayer. You will not be given the benefit of the doubt.
Classify your accounts by separating them into five groups:
1. Income
2. Expenses
3. Assets
4. Liabilities
5. Equity (net worth).
For your assets, record the date of acquisition, cost or other basis, depreciation, depletion, and anything else affecting their basis. Basis is the amount of your investment in a property for tax purposes.
Keeping Records: You must keep the books and records of your business available at all times for inspection by the IRS. Records must be kept as long as they may be needed in the administration of any Internal Revenue law. Keep records supporting items reported on a tax return until the period of limitations for that tax year has expired. Usually, this is the later of:
1. Three years after the date your return is due or filed; or
2. Two years after the date the tax was paid.
However, you should keep some records indefinitely. For example, if you adopt the last-in first-out (LIFO) method of valuing your inventory or change your accounting method, records supporting these decisions and approvals from the IRS may be needed for an indefinite time.
You should also keep records that support your basis in property for as long as they are needed to figure the correct basis of your original or replacement property (including capital improvements). Keep copies of your tax returns. They will help you in preparing future tax returns and in making computations if you later file an amended return or a claim for a refund.
Using Microfilm For Recordkeeping: Microfilm and microfiche reproductions of general books of accounts (such as cash books, journals, voucher registers, and ledgers) are accepted by the IRS for recordkeeping purposes if they comply. If your micrographic system does not meet the requirements of Revenue Procedure 81-46, you may be subject to penalties.
Using Computerized Recordkeeping: If you maintain your records with an automated data processing system, you must be able to produce legible records from the system to provide the information needed to determine your correct tax liability. You must keep a complete description of the computerized portion of your accounting system. This documentation must be sufficiently detailed to show the applications being performed; the procedures used in each application; or the controls used to ensure accurate and reliable processing; and controls used to prevent the unauthorized addition, alteration, or deletion of retained records. These records must be retained for as long as they may be material in the administration of any Internal Revenue law.
Write checks payable to yourself only when making withdrawals of income from your business for your own use. Avoid writing business checks payable to cash as it is important to identify which disbursements are business and which are personal. In the event of an IRS audit, this is an area that will get close scrutiny. The IRS auditor will not only look at each check to see to whom it was paid, but will also look at the reverse of the check to see by whom and how the check was endorsed. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt or a cash payment, put a statement in your records at the time of the transaction to explain the payment.
Get receipts for all business expenditures. For all business trips, make sure always to get receipts from hotels and motels. Toll receipts can also help to substantiate travel expenses. Obtain receipts from the post office when you purchase stamps and mail larger envelopes and packages. You should establish a petty cash fund for small expenses. All business expenses paid by cash should be clearly substantiated by documents showing their business purpose.
Support your entries with sales slips, invoices, canceled checks, paid bills, duplicate deposit slips, and any other documents that explain and support entries made in your books. File these materials in a safe place. Memorandums or sketchy records that approximate income, deductions, or other items affecting your tax liability will not be considered adequate by the IRS. Remember, where the IRS is concerned, the burden of proof is on the taxpayer. You will not be given the benefit of the doubt.
Classify your accounts by separating them into five groups:
1. Income
2. Expenses
3. Assets
4. Liabilities
5. Equity (net worth).
For your assets, record the date of acquisition, cost or other basis, depreciation, depletion, and anything else affecting their basis. Basis is the amount of your investment in a property for tax purposes.
Keeping Records: You must keep the books and records of your business available at all times for inspection by the IRS. Records must be kept as long as they may be needed in the administration of any Internal Revenue law. Keep records supporting items reported on a tax return until the period of limitations for that tax year has expired. Usually, this is the later of:
1. Three years after the date your return is due or filed; or
2. Two years after the date the tax was paid.
However, you should keep some records indefinitely. For example, if you adopt the last-in first-out (LIFO) method of valuing your inventory or change your accounting method, records supporting these decisions and approvals from the IRS may be needed for an indefinite time.
You should also keep records that support your basis in property for as long as they are needed to figure the correct basis of your original or replacement property (including capital improvements). Keep copies of your tax returns. They will help you in preparing future tax returns and in making computations if you later file an amended return or a claim for a refund.
Using Microfilm For Recordkeeping: Microfilm and microfiche reproductions of general books of accounts (such as cash books, journals, voucher registers, and ledgers) are accepted by the IRS for recordkeeping purposes if they comply. If your micrographic system does not meet the requirements of Revenue Procedure 81-46, you may be subject to penalties.
Using Computerized Recordkeeping: If you maintain your records with an automated data processing system, you must be able to produce legible records from the system to provide the information needed to determine your correct tax liability. You must keep a complete description of the computerized portion of your accounting system. This documentation must be sufficiently detailed to show the applications being performed; the procedures used in each application; or the controls used to ensure accurate and reliable processing; and controls used to prevent the unauthorized addition, alteration, or deletion of retained records. These records must be retained for as long as they may be material in the administration of any Internal Revenue law.
A Crash Course On Understanding Financial Statements
Businesses operate to achieve various goals. To meet these goals a business must achieve two primary objectives: To earn a satisfactory profit and to remain solvent (be able to pay its debts). If a business fails to meet either of these primary objectives, it will not be able to survive in the long run.
Financial statements are accounting reports used to summarize and communicate financial information about a business. Three major financial statements - the income statement, the statement of changes in financial position, and the balance sheet - are used to report information about the business's primary objectives. These financial statements are the end result of the accounting process. Each of them summarizes certain information that has been identified, measured, recorded, and retained during the accounting process.
Income Statement: An income statement is a financial statement summarizing the results of a business's earnings activities for a specific period of time. It shows the revenues, expenses, and net income (or net loss) of the business for this period. Revenues are the prices charged to the business's customers for goods and services provided. Expenses are the costs of providing the goods or services. The net income is the excess of revenues over expenses; a net loss arises when expenses are greater than revenues.
Statement of Changes in Financial Position: A statement of changes in financial position is a financial statement summarizing the results of a business's financing and investing activities for a specific time period. The results of the business's financing activities are shown in a "Sources" section of the statement; this section includes sources from operations and other sources.
Balance Sheet: A balance sheet summarizes a business's financial position on a given date. It is alternatively called a statement of financial position. A balance sheet lists the business's assets, liabilities, and owner's equity.
Assets: Assets are the economic resources of a business that are expected to provide future benefits to the business. A business may own many assets, some of which are physical in nature, such as land, buildings, supplies to be used in the business, and goods (inventory) that the business expects to sell to its customers. Other assets do not possess physical characteristics, but are economic resources because of the legal rights they convey to the business. These assets include amounts owed by customers to the business (accounts receivable), the right to insurance protection (prepaid insurance), and investments made in other businesses.
Liabilities: Liabilities are the economic obligations (debts) of a business. The external parties to whom the economic obligations are owed are referred to as the creditors of the business. Usually, although not exclusively, legal documents serve as evidence of liabilities. These documents establish a claim (equity) by the creditors (the creditors' equity) against the assets of the business. Liabilities include such items as amounts owed to suppliers (accounts payable), amounts owed to employees for wages (wages payable), taxes payable, and mortgages owed on the business's property. A business 'may also borrow money from a bank on a short or long-term basis by signing a legal document called a note, which specifies the terms of the loan. Amounts of such loans would be listed as notes payable.
Owner's Equity: The owner's equity of a business is the owner's current investment in the assets of the business. For a partnership, the owner's equity might be referred to as the partners' equity; for a corporation, stockholders' equity. The owner's equity is affected by the capital invested in the business by the owner, by the business's earnings from its operations, and by withdrawals of capital by the owner of the business.
Financial statements are accounting reports used to summarize and communicate financial information about a business. Three major financial statements - the income statement, the statement of changes in financial position, and the balance sheet - are used to report information about the business's primary objectives. These financial statements are the end result of the accounting process. Each of them summarizes certain information that has been identified, measured, recorded, and retained during the accounting process.
Income Statement: An income statement is a financial statement summarizing the results of a business's earnings activities for a specific period of time. It shows the revenues, expenses, and net income (or net loss) of the business for this period. Revenues are the prices charged to the business's customers for goods and services provided. Expenses are the costs of providing the goods or services. The net income is the excess of revenues over expenses; a net loss arises when expenses are greater than revenues.
Statement of Changes in Financial Position: A statement of changes in financial position is a financial statement summarizing the results of a business's financing and investing activities for a specific time period. The results of the business's financing activities are shown in a "Sources" section of the statement; this section includes sources from operations and other sources.
Balance Sheet: A balance sheet summarizes a business's financial position on a given date. It is alternatively called a statement of financial position. A balance sheet lists the business's assets, liabilities, and owner's equity.
Assets: Assets are the economic resources of a business that are expected to provide future benefits to the business. A business may own many assets, some of which are physical in nature, such as land, buildings, supplies to be used in the business, and goods (inventory) that the business expects to sell to its customers. Other assets do not possess physical characteristics, but are economic resources because of the legal rights they convey to the business. These assets include amounts owed by customers to the business (accounts receivable), the right to insurance protection (prepaid insurance), and investments made in other businesses.
Liabilities: Liabilities are the economic obligations (debts) of a business. The external parties to whom the economic obligations are owed are referred to as the creditors of the business. Usually, although not exclusively, legal documents serve as evidence of liabilities. These documents establish a claim (equity) by the creditors (the creditors' equity) against the assets of the business. Liabilities include such items as amounts owed to suppliers (accounts payable), amounts owed to employees for wages (wages payable), taxes payable, and mortgages owed on the business's property. A business 'may also borrow money from a bank on a short or long-term basis by signing a legal document called a note, which specifies the terms of the loan. Amounts of such loans would be listed as notes payable.
Owner's Equity: The owner's equity of a business is the owner's current investment in the assets of the business. For a partnership, the owner's equity might be referred to as the partners' equity; for a corporation, stockholders' equity. The owner's equity is affected by the capital invested in the business by the owner, by the business's earnings from its operations, and by withdrawals of capital by the owner of the business.
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