Accounting 101: Adjusting Journal Entries

Recording transactions in your accounting software isn’t always enough to keep your records accurate. If you use accrual accounting, your accountant must also enter adjusting journal entries to keep your books in compliance. By recording these entries before you generate financial reports, you’ll get a better understanding of your actual revenue, expenses, and financial position.

Accrual Accounting and Adjusting Journal Entries

Under the cash method of accounting, a business records an expense when it pays a bill and revenue when it receives cash. The problem is, the inflow and outflow of cash doesn’t always line up with the actual revenue and expense. Say, for example, a client prepays you for six months’ worth of work. Under cash accounting, revenue will appear artificially high in the first month, then drop to zero for the next five months.

Under accrual accounting, revenues and expenses are booked when the revenues and expenses actually occur instead of when the cash transaction happens. To put these revenues and expenses in the right period, an accountant will book adjusting journal entries. For this example, the accountant would record an equal amount of revenue for each of the six months to reflect that the revenue is earned over the whole period. The actual cash transaction would still be tracked in the statement of cash flows.

Types of Adjusting Entries

Most adjusting entries fall into one of five categories:

01. Accrued expenses are those you’ve accrued but haven’t paid yet. A common accrued expense is a loan interest payment that’s due once a year. Accrued expenses usually appear as accounts payable liabilities.

02. Deferred expenses are expenses you’ve paid but not yet realized the benefit of. If you prepay your insurance a year in advance, for example, that’s a deferred expense. Deferred expenses appear on the balance sheet as assets.

03. Accrued revenues are those on which you’ve earned the revenue but are waiting for the cash payment. These appear as accounts receivable, an asset account.

04. Deferred revenues occur when you’ve been prepaid by a client but you haven’t finished the work yet. This appears on the balance sheet as a liability.

05. Noncash transactions represent expenses and reserves that don’t have a cash effect on your business. Depreciation and allowance for doubtful accounts are two examples of common noncash transactions.

Why and When to Book Adjusting Entries

How often your company books adjusting journal entries depends on your business needs. Once a month, quarterly, twice a year, or once a year may be appropriate intervals. If you intend to use accrual accounting, you absolutely must book these entries before you generate financial statements or lenders or investors.

Ideally, you should book these journal entries before you make any big financial decisions or evaluate your finances. If the entries aren’t booked, it’s easy to forget about obligations and get a skewed picture of your financial position. For example, if you have an annual loan interest payment due in February and no liability is reflected on the books in January, you’re going to overestimate your available cash. Likewise, if you make an annual business insurance payment and it’s not adjusted, you may believe your overall cost of doing business has increased when it hasn’t.

Booking the Journal Entries

Booking adjusting journal entries requires a thorough understanding of financial accounting. If the person who maintains your finances only has a basic understanding of bookkeeping, it’s possible that this person isn’t recording adjusting entries. Full-charge bookkeepers and accountants should be able to record them, though, and a CPA can definitely take care of it.

Adjusting journal entries can get complicated, so you shouldn’t book them yourself unless you’re an accounting expert. Your accountant, however, can set these adjusting journal entries to automatically record on a periodic basis in your accounting software. That way you know that most, if not all, of the necessary adjusting entries are reflected when you run monthly financial reports.

If you have any questions about your business accounting, please feel free to contact our offic.

8 Business Expenses You Can’t Write Off

 

The IRS is fairly generous when it comes to tax deductions for small businesses. As a general rule, a business can write off any ordinary and necessary expense it incurs. There are, however, some notable exceptions to that rule. These eight expenses seem like legitimate deductions — but can be difficult or impossible to write off.

1. Gifts for Customers

Business gifts are deductible — but to a very limited extent. The IRS allows taxpayers to deduct the first $25 worth of gifts to a customer. That means if you give a $25 gift to 10 different customers, you could take a total deduction of $250. But if you give a $250 gift to one client, you could only deduct $25.

2. Business Clothes

Unless it’s a uniform you have to wear for work or a form of protective equipment, clothing or shoes you buy for work aren’t deductible.

3. Commute Costs

If you travel for business using your own vehicle, feel free to deduct the mileage at the IRS standard rate, which is currently 57.5 cents per mile. Your commute to your place of business, however, can’t be deducted. To account for this, you need to subtract the length of your commute if you visit a client site instead of your place of work. For example, say your office is a 10-mile round trip from your house and instead you go straight from your home to a client site for the day. If the client’s location is 30 miles from your house round trip, you can only deduct 20 miles (30 miles minus your usual 10-mile commute).

4. Eating Out

If you take a client out to lunch, you can deduct half of the cost as meals and entertainment expense. However, if it’s just you, or if the lunch has no business connection to it, it’s not deductible.

5. Fines or Penalties

Any fines or penalties levied against you for breaking the law aren’t deductible. That means that you can’t deduct traffic or parking tickets even if you receive them when traveling for business.

6. Life Insurance Premiums

On the whole, any benefit premiums or payments you make on behalf of your employees are deductible, but there’s an exception for life insurance premiums. If you pay the premiums and your business is not the beneficiary of the plan, you can deduct them. But if your business is a beneficiary or receives some sort of indirect benefit if the employee dies, you can’t deduct the premium payments.

7. Political Donations

You can get a write-off if your business donates to a registered 501(c)3 charity. You cannot, however, deduct donations made to a political organization or a political candidate. Any expenses you incur to lobby the government — or pay a group to lobby on your behalf — aren’t deductible, either.

8. Cell Phone Expenses

You use your cell phone for work calls, so the bill is deductible, right? Not necessarily. Thompson Tax and Accounting explains that cell phones are considered to be listed property by the IRS and require some extra legwork to deduct. Phones, along with computers and cars, are items that often have both a business and personal use. You can only write off the business portion of the expense, so you need to calculate what percentage of calls were for business and only deduct that percentage of the expense.

If you have any questions about your business accounting and taxes, please feel free to contact our office.

10 Common Accounting Mistakes Business Owners Make

As a business owner, it is important to be involved in all aspects of your operation. That doesn’t mean, however, that you are an expert at everything. Business owners may wear those strategic and customer-relations hats well, but many have a much more difficult time when it comes to donning that accounting chapeau.

Even worse, financial mistakes can actually stunt growth or adversely impact your bottom line, clog cash flow, attract undue attention from the IRS or damage reputations with suppliers, customers and staff.

To avoid those scenarios, here are 10 accounting mistakes business owners commonly make and the reasons why these errors—both calculated and inadvertent—can be so detrimental.

1. Falling Behind in Entries and Reconciliation

Time is definitely not on the side of the small business owner, especially when there may be daily fires to put out. Suddenly, months have passed without making any entries in the books nor reconciling any business checking statements, credit card statements, sales tax accounts or other types of financial accounts. This means financial statements and reports are not current. Without up-to-date information, it is challenging to make sound business decisions.

For example, spending money may result in a negative balance or reduced profitability because unpaid invoices have gone unnoticed. Not entering financial data can also lead to problems with suppliers, where invoices to be paid may go unnoticed, leading to problems in getting materials or even a bad credit rating for the business.

2. Struggling to Be Accounting Software Savvy

In a rush to get the business set up, some business owners may not have spent time to properly learn the accounting software they selected. Not knowing what the accounting software is capable of doing means you could easily make a mistake or miss out on some powerful functionality. Not setting up a software system correctly could also lead to unused reporting capability and incomplete information that results in bad business decisions.

3. Not Seeing the Reports for the Tools

Accounting is not just a tool for entering financial data in order to fulfill state and federal tax regulations or tell you how much money is in the bank. Instead, accounting is a powerful mechanism that provides answers to questions related to how a business owner’s strategic decisions are working or not working.

That’s why a big mistake is not using the plethora of business reports that can be made from the financial data, including accounts-payable aging, accounts-receivable aging and reports about company profitability. These reports can show where issues are, including determining where clients are not paying in order to maintain cash flow. If these aging reports are not produced, a business owner will not know who is behind on payments and may miss clients who are not happy with quality.

4. Mixing Business and Personal Finances

One of the most common accounting mistakes business owners make is to mix their business and personal finances. Keep these separate and distinct to provide a more accurate track record of what was really used for business and what specifically related to personal use only.

For example, while the IRS can understand that a certain number of meals throughout a month might be business-related, those tickets to a concert or video games on the business credit card clearly do not. The business can also be impacted because more money is being spent on the owner’s life rather than being reinvested to grow the company.

For these reasons, it is better to maintain separate accounts in order to mentally and physically look at the business as a separate entity rather than an ATM. In the long run, this will help the business to grow and still provide a business owner with significant income.

5. Trashing Receipts

Paper trails still count, but even those can become digitized. However receipts are kept, the point is that they need to be retained. Receipts provide answers to any mistakes or gaps in accounting records, and many offer additional deduction opportunities come tax time.

Even more importantly, if the IRS comes calling, those receipts deliver proof to validate the numbers on financial statements. Not having those receipts means the IRS can deem those entries as invalid deductions, changing tax amounts and potentially leading to penalties.

6. Making Math Mistakes

In the rush to get the books done after a long day, math mistakes can happen quite easily, even when using automated accounting solutions. Math mistakes can also result from posting entries to the wrong account or even just making typos.

Combine that with Accounting Mistake No. 1 on the list, and this can be a recipe for financial disaster because these math mistakes can then go unnoticed for months if not regularly checked for accuracy. Suddenly, one math mistake results in a tangled web of accounting errors, leading to bigger problems.

7. Focusing Only on the Short Term

With the day-to-day issues of running a business, it is easy to fixate on the short term and completely forget about the future. Accounting, however, is not just keeping track of today’s numbers. It’s also about forecasting future growth and identifying any financial risk from current financial decisions or results.

With the need to look to the future, there are many issues to consider, including long-term accounting issues and opportunities for company growth. Also pay attention to any related operational concerns, such as the need to add more accounting staff to handle the growing business. For example, a business owner may add a new subsidiary that makes different products or add locations in other countries.

8. Hiring the Wrong Person

Whether it is a family member, an inexperienced office temp or even the business owner who hires themselves to do the accounting, the wrong person can create financial problems that go beyond just making uninformed decisions. In fact, trying to save money or help a loved one out can actually lead to audits or penalties. Hiring the wrong person can create issues that haunt your business for many years to come.

This can occur if the person hired does not know how to classify expenses correctly or create accurate journal entries. He or she may not have knowledge of tax laws, including what can be included in the accounting for a business and what must be kept separate. He or she may also not be familiar with invoicing or currency exchange when accounting for business elsewhere in the world.

The right accounting professional can help a business owner to avoid errors that are detrimental to the business. These inadvertent errors could include the type of accounting method used, such as cash versus accrual, as well as mistakes related to interpretation of facts about assets, bad-faith estimates that involve unrealistic conclusions about specific assets and incorrect recognition related to accrual of expenses.

9. Thinking Technology Is Always the Solution

Throwing money at technology does not guarantee accounting mistakes will be avoided. After all, you still need to make the technology work correctly. Also, not all technology was created equally or is relevant to a specific businesses.

For example, a small business owner does not have to invest in expensive enterprise accounting systems, but can likely utilize a system that works well with simpler financial statements and be able to scale as the business grows. Therefore, it is important to select the technology that matches the individual need and application for a business. This is where good planning, strategic thinking and research become invaluable to ensure that technology does not add to the accounting mistakes.

10. Not Letting Go

As a business owner, it is tough to admit when the Superman or Wonder Woman cape doesn’t fit, but there are situations where not getting professional help is a major mistake. It is okay to admit that accounting may not be your area of expertise.

You likely started a company with a great idea or solution that had nothing to do with accounting, and that is where you should focus. There are accounting professionals out there that can handle invoicing or other accounting functions in order to let you concentrate on what you do best. As the business grows, there is a time to migrate from the DIY approach and to utilize other responsible parties, including an accounting professional.

The financial side of running a business can make or break your company. Learning when to use tools or professionals to help in areas you struggle with can be one of the biggest issues for business owners.

If you have any questions about your business accounting and financials, please feel free to contact our office.

Differences Between IRS Forms W-2 and W-4

Whether you’re a business owner or an employee, tax forms are an inescapable part of your job. Between the numerous consonants and hyphens, it’s easy to get lost in the IRS’ alphabet soup. Two related documents, Forms W-4 and W-2, are subject to confusion because their names are so similar. They are both related to an employee’s tax situation, but serve different functions.

Since it’s relatively easy to mix the two up, we’re going to take a look at how they differ, what purposes they serve, and when both employers and employees should think about them.

About the W-4

The W-4 is a tax form used to calculate the correct amount of federal income tax that should be withheld from an employee’s pay. An employee must consider factors like his or her family situation (i.e. number of children, marital status, etc.), home ownership (i.e. buying or selling a house), saving contributions (i.e. college, retirement, etc.), number of dependents and even employment status. This form is required for all employees except those that earn less than $800 per year.

This form must be completed whenever an employee starts a new job. An employee can also update his or her W-4 at any time based on changes in his or her personal or financial situation. As an employer, you are under no obligation to request updates. If a new hire is unsure about how much pay to withhold, he or she can use the IRS’ Online Withholding Calculator for assistance.

About the W-2

The W-2 is a tax form that employers give to their employees at the end of each year. This form includes the total amounts of wages earned, federal and state taxes withheld, and contributions to Social Security for a given tax year. After receiving it from his or her employer, the employee must submit this information when paying taxes in April with their Form 1040.

Employers are required to provide their employees with this information by January 31 of each year and submit a copy to the Social Security Administration (SSA) by February 29. A copy must also be kept on record for a minimum of four years. An additional three copies are furnished to employees for their personal records and tax filings.

If you have any questions, please feel free to contact our office.

Tips for Taxpayers Starting a New Business

Anyone starting a new business should be aware of his or her federal tax responsibilities. Here are several things you should know if you plan on opening a new business this year.

1. First, you must decide what type of business entity you are going to establish. The type of business you open will determine which tax form has to be filed. The most common types of business are the sole proprietorship, partnership, corporation, and S corporation

2. The type of business you operate will determine what taxes must be paid and how you pay them. The four general types of business tax are income tax, self-employment tax, employment tax, and sales or excise tax.

3. An employer identification number is used to identify a business entity. Most businesses need an EIN, and your business will definitely need one if you hire employees, regardless of the type of business entity selected. Please call this office to determine whether your business needs an EIN and get assistance in obtaining one if it does.

4. Good records will help ensure the successful operation of your new business. You may choose any record-keeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kinds of records. However, the business you are in will affect the types of records that will have to be kept for federal tax purposes. If you need assistance or guidance in setting up your business records, please give this office a call.

5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and accrual method. Under the cash method, income is generally reported in the tax year it is received, and expenses are deducted in the tax year they are paid. Under an accrual method, income is generally reported in the tax year it was earned, if not yet received, and expenses are deducted in the tax year they are incurred, even though they are not yet paid.

If you are contemplating starting a business or if you already have one, please contact our office if you need assistance with your accounting, bookkeeping, payroll or sales tax reporting, or other federal or state compliance issues.

 

Top Tax Write-Offs for Small Business Owners

With each tax deduction you take, you reduce your overall tax burden. And as a small-business owner, you can use all the relief you can get.

Make sure you don’t leave money on the table this tax season by taking advantage of these top tax write-offs:

Home Office

If you use a portion of your home regularly and exclusively for work purposes and your home is the principal place that you conduct your business, you can deduct the expense.

To calculate your deduction, you have two options: You can go the simpler route and multiply a prescribed rate by the allowable square footage of the office to come up with the deduction. Or you can follow the more complex regular method, which requires you to determine the actual expenses of your home office, including mortgage interest, insurance, utilities, repairs, and depreciation based on the percentage of your home devoted to business use.

Note: The more complex option may take up more of your time, but if you’ve kept accurate records, you will likely receive a higher deduction going that route.

Meals and Entertainment

If you provide yourself, employees, or clients with meals or entertainment regularly for business purposes, you can deduct the expenses — as long as the reason for the expense furthered your business in some way (resulted in a sale, new client lead, or referral, for example). Meals include the amount you spend on food, beverages, taxes, and tips.

Save all your receipts and note on the receipt or in your calendar/planner the business-related purpose of the meeting. If you are audited, you will have to prove that the expenses were solely for the good of the business.

Note: You cannot deduct expenses for lavish or extravagant meals, so keep your expenditures reasonable.

Mileage

If you rack up the miles on your car for business purposes, you can claim the deduction in one of two ways: Total your mileage and multiply it by the 2015 Standard Mileage Rate of 56 cents. Or you can compare business use of your car against your personal use and deduct a portion of your expenses, including gas, repairs, depreciation, registration fees, and insurance.

Note: Your mileage meter starts at your first business-related destination (for example, your store or a client’s location) and you can’t include your commute to and from home.

Travel

Ordinary and necessary expenses you accrue when you or employees travel for business are deductible. These expenses include:

• Transportation by airplane, train, bus, or car between your home and a business destination (special rules apply to luxury water travel and cruise ships).
• Fares for taxis, buses, and limousines that take you to the airport and from your hotel to your business-related event.
• The cost of shipping baggage and materials used for business purposes.
• Expenses associated with operating and maintaining your car when you are traveling for business. (You can deduct actual expenses or the standard mileage rate; pick whichever one provides you with the highest deduction.)
• Tolls and parking.
• Car rental fees for the business-related portion of your trip.
• Lodging and meals if you are required to stay overnight or long enough that you need to stop and rest.
• Dry cleaning and laundry services you use during a business trip.
• Any business calls or fax expenses you accrue while traveling.
• Employee expenses — if the person has a business purpose for traveling with you and the expenses are permissible by IRS standards.
• Business associate expenses (for example, a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser) — if the person has a business purpose for traveling with you and the expenses are permissible by IRS standards.

Maintain very thorough records of all of your expenses so that you can accurately calculate your deductions and explain any expenses should you be audited.

Employee Expenses

You can typically deduct the amount you pay employees for working for you. In addition, you can deduct the amount of money you put into employees’ (and your) retirement plans.

Business Expenses

If you rent property — and have no equity or title in it — you can deduct rent as a business expense. If you pay interest on money you borrowed for business activities, you can also deduct that cost.

In addition, you typically can deduct the ordinary and necessary cost of insurance as a business expense if it is for your trade, business or profession. Finally, if you purchase off-the-shelf computer software “that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified,” you can deduct the expense.

Education

You can deduct learning and professional development activities and resources for you and your employees, if those activities and resources are related directly to your business. Courses, workshops, seminars, trade shows, and even books, DVDs, magazines, and other training materials are deductible.

The potential for deductions doesn’t end with this list. Be sure that you can take advantage of every tax write-off available to you by doing your research — and preparing your documentation — sooner rather than later.

If you have any questions about your business accounting and taxes, please feel free to contact our office.

Don’t Make These Small Business Wage Garnishment Mistakes

One of the less savory aspects of running a small business is interacting with creditors, especially if you or someone you employ defaults on a debt. Wage garnishment is a subject no one wants to deal with, but failing to understand how your — or your employees’ — debts affect your small business can cost you thousands of dollars. The garnishment process is difficult to understand and can differ depending on the state (causing confusion that creditors can exploit to their advantage), but avoiding these common mistakes can help keep your small business from being torn apart by delinquent debt.

Being on the Hook for an Employee

A creditor can sue a business for an employee’s defaulted loan if the employer fails to comply with an order to garnish the employee’s wages properly. When a court orders a business to withhold a portion of an employee’s wages, the business becomes liable for the debt as well as the employee. If the business doesn’t garnish the correct amount of an employee’s wages, a creditor can sue the business for the amount that was supposed to be garnished, as well as attorney fees and punitive damages.

Sole proprietors are particularly vulnerable. You are most likely a sole proprietor if you are the sole owner of a business and haven’t filed any paperwork with a state in order to operate. As a sole proprietor, you aren’t legally required to have a registered agent, an individual or company that receives the paperwork when a business is a party in a legal action including garnishment matters. Without the expertise of a registered agent, though, a sole proprietor doesn’t have much protection against lawsuits involving garnishment. Horror stories abound — one former consultant found himself owing a creditor more than $10,000 for a former employee and a Texas florist had to pay a student loan creditor over $6,500 in uncollected garnishments for a delinquent employee.

As a sole proprietor, courts don’t differentiate between your business and personal assets, meaning creditors can come after your house or vehicle, for example. To avoid being liable, considerrestructuring as an LLC or S Corporation. Although it doesn’t provide as much liability protection as incorporating, you can also opt to hire a registered agent as a sole proprietor.

Thinking You’re Safe as a Contractor

Although your wages can’t be garnished if you are an independent contractor (such as a freelance writer or self-employed plumber) since you don’t earn traditional wages, creditors can still come after your earnings. While creditors can only garnish a percentage of wages, they can come after larger swaths of assets at once if you are a contract worker. Rules change for such “non-employees,” and it can mean creditors can go into your bank account to collect a defaulted debt you owe. A judge can rule that a creditor can levy a personal or business bank account; both can be at risk if your business is a sole proprietorship. Even if it leaves your account balance at zero, banks usually have to hand over up to 100 percent of your debt. If a creditor claims you owe $4,000 and you have $2,000 in an account, for instance, the court would order your bank to pay the creditor the entire $2,000. You may be eligible for some exemptions–federal law says creditors can’t take social security income and certain states have limits to what creditors can take from personal bank accounts (in Wisconsin, for example, the first $5,000 of a debtor’s depository accounts are protected).

If you find yourself in this situation, the worst tactic is to ignore the creditors and court orders. Although it might be a blow to your pride, declaring bankruptcy can stop a lawsuit from a creditor and prevent them from wiping your accounts clean — but you have to act before the lawsuit is decided.

Failing to Respond Correctly

The laws surrounding wage garnishment are undeniably byzantine. It can also be easy to ignore mail from creditors regarding former employees — a novice receptionist might even file such notices in the trash. While receiving a writ regarding an employee’s wage garnishment can be confusing and intimidating, failing to respond promptly and appropriately could mean your business is liable for the defaulted debt.

The garnishment notice is a court order, after all. The orders often demand an accurate and complete response from an employer within two weeks. If your business fails to do this, you might find yourself in court or worse — a judge could rule your business liable for the entire debt in question.

Firing an Employee with Debt

Because employers are responsible for calculating garnishment amounts on an employee’s paycheck, the whole process can make payroll accounting a pain. Therefore, it might be tempting just to fire the employee. But dismissing an employee just for having garnished wages is against federal law, and some states offer even more protection for employees. (If an employee has two or more different creditors attempting to garnish wages, though, an employer can legally discharge him or her, according to United States government.) Penalties for breaking these laws can range from reinstating the fired employee to jail time for the business owner.

If you have any questions about your company payroll, please feel free to contact us.

Do You Need an Audit, a Review or a Compilation?

CPA firms offer a variety of services to help small businesses with financial reporting requirements. Audits, reviews, and compilations can help your business secure a loan, satisfy regulatory rules, or entice new investors. These services can be pricey, so it’s a good idea to understand what each entails before you commit.

Audit

If you need to prove to another party that your financial statements are accurate, an audit is the way to go. During audits, CPAs analyze your accounting records and study the documentation for your transactions. After finishing this research, the CPA issues an opinion. If he likes what he sees, he’ll give you an unqualified opinion. This means that he believes that your financial statements comply with generally accepted accounting principles in all material respects.

When an Audit Is Necessary

All publicly traded companies are required to send audited financial statements to the SEC on an annual basis. If you see a public offering in your future, you’ll need an audit the year you IPO and all subsequent years. The federal government and state governments may require an annual audit if you accept funding from them. If you want an especially large business loan and the bank sees your company as high risk, the loan officer may ask for audited financial statements.

When an Audit Is Worth It

An audit is the highest level of assurance you can obtain from a CPA. Because the stakes are high, the CPA has to spend a lot of time reviewing your transactions — which most likely means a large bill for you in the end. Because audits can be so costly, most small businesses don’t get them unless they absolutely have to. However, audited financial statements may make the difference in getting a loan approval and can even get you a lower interest rate.

Review

A financial review is similar to an audit, but not quite as rigorous. When conducting a review, the CPA expresses limited assurance about your financial statements. Rather than digging through documentation, the CPA performs basic analytical procedures to double-check that the financial statements make sense. The best opinion you can get from a review is simply that the CPA is not aware of any material departures from GAAP.

When a Review Is Necessary

It’s fairly common for lenders to request a review before they issue a small business loan. If the loan contains ongoing financial requirements — known as loan covenants — you’ll probably need to provide reviewed financial statements for every year that the loan is outstanding.

When a Review Is Worth It

If you want a CPA stamp of approval on your financials, but aren’t required to get a full-blown audit, a review can be a good option. Because there’s less assurance provided in a review, the CPA spends less time reviewing your books and passes that savings along to you. Reviews can be a helpful tool if you’re trying to woo new investors or are looking for a buyer for your business.

Compilation

During an audit or a review, you prepare your financial statements and your CPA reviews and expresses an opinion about them. During a compilation, your CPA assists you in preparing the financial statements but doesn’t opine on their quality or accuracy.

When a Compilation Is Necessary

The American Institute of CPA’s believes that compilations are best suited for very simple accounting situations. For example, a compilation may be appropriate if your business uses the cash method of accounting and needs to translate that to the accrual method. If your company is small and your transactions are straightforward, a lender may accept this in lieu of a financial review for a loan application.

When a Compilation Is Worth It

Compilations aren’t very time intensive and are generally much cheaper than audits and reviews. Unfortunately, sometimes you get what you pay for. Although you’d hope that compiled financial statements comply with GAAP, your accountant has no obligation to ensure that they do. You’re essentially paying for the right to say that a CPA has helped you put together financial statements. But for a report to existing investors, or to obtain a new business insurance policy, that may be all you need.

If you are in the need of an accounting audit, please feel free to contact our office.

Accounting Basics: How to Complete a Bank Reconciliation

Your current bank account balance doesn’t actually represent your available cash. If you have a few sizable checks outstanding, your business checking account can easily go into the red.

By maintaining separate accounting of your transactions, and performing a monthly bank reconciliation, you can understand your cash flow and true cash position. The bank reconciliation process is similar to balancing your checkbook: It reveals any erroneous or missing entries so you can be confident that your cash balance is correct. Here are the steps to follow.

1. Compare Closing Balances From Your Bank and Your Books

You should always compare your bank statement and accounting balance — also known as your book balance — side by side and adjust transactions until both cash balances match. Most accounting software has a reconciliation module that allows you to enter the ending cash balances of your bank account to assist you with the reconciliation process. If you don’t have that, print out the month’s transactions on paper to compare them or export them into a spreadsheet program.

2. Add Bank-Only Transactions to Your Book Balance

There are usually some monthly debits and credits your bank tacks on that you didn’t account for in your books. Add positive transactions — like a monthly interest payment from your bank — and subtract negative transactions — like bank charges and bounced check fees — from your book cash balance.

It’s pretty easy to spot these bank-initiated transactions. There will only be a few, and they are often grouped together at the bottom of your bank statement.

3. Add Book-Only Transactions to Your Bank Balance

Your bank statement won’t reflect outstanding checks that payees haven’t cashed yet, and it may not show deposits still being processed. Add the positive transactions — deposits in transit — and subtract negative transactions — checks waiting to be cashed — from the bank balance.

It won’t be readily apparent which transactions aren’t accounted for in your bank statement. This is where your accounting software comes in handy. Most reconciliation modules allow you to tick off the checks and deposits listed on the bank statement. If you don’t have a reconciliation module, you can tick off transactions manually.

4. Compare Your Balances

Compare your adjusted bank balance and your adjusted book balance. Ideally, the numbers match and you’re finished. If they’re still not the same, there are a few potential culprits:

• Transposition error: If the reconciliation difference is divisible by 9, that’s an indication you’ve made a transposition error — inputting the wrong amount in your accounting system. For example, you wrote a check to someone for $32, but you recorded it as $23 in your accounting software. You can avoid these errors by printing checks directly from your accounting system.
• You forgot to record a transaction: A check went out or a deposit was made and you forgot to record it. Scrutinize any items listed on the bank statement that aren’t listed in your books — do they look familiar? If the transactions did indeed occur, add them to your book balance.
• Your beginning cash balance is incorrect: If your beginning balance in your accounting software isn’t correct, the bank account won’t reconcile. This can happen if you’re reconciling an account for the first time or it wasn’t properly reconciled last month.
• A journal entry affected your cash balance: You could have accidentally booked a journal entry that debited or credited cash. Navigate to your list of journal entries and ensure that none of them impacted your bank account balance.

When the Account Won’t Reconcile

Every once in a while, you just won’t be able to get an account to reconcile. As long as the difference is small relative to your bank account balance, don’t waste time spinning your wheels. Most reconciliation modules allow you to label the difference as a reconciliation error. Most likely, you’ll find the missing transaction during next month’s reconciliation.

If you have any questions about your business accounting or QuickBooks, please feel free to contact our office.