#1: Account Types
There are six Account types that are used in every business:
Asset – An item that your company owns. Current Assets include those items that can be converted to cash within one year, such as Checking and Savings Accounts, Inventory, and Accounts Receivable. Fixed Assets include those items that are not expected to be converted to cash during one year of normal business operations, such as Loans Receivable, Machinery, Equipment, and Furniture and Fixtures.
Liability – A debt that your company owes. Current Liabilities include Accounts Payable, Credit Card Liabilities, Sales Tax Payable, and Payroll Taxes Payable. Long Term Liabilities include Loans Payable, Notes Payable, and Mortgage Payable.
Equity (or Capital) – The net worth of your company. Equity comes from two sources: money invested by owners or shareholders, and profits and losses earned by your business.
Revenue– Money that comes into the company and earned from sales or services.
Cost of Goods Sold – The cost of goods and materials held in inventory and then sold.
Expense – Money that is being spent by the company on business-related items.
#2: Financial Statements
There are two Financial Statements that are important to every business.
Balance Sheet – A report that summarizes the financial position of your company. It shows the value of your company’s assets, liabilities, and equity as of a specific day. It is called a Balance Sheet, because the value of the Assets is always exactly equal to the combined value of the Liabilities and Equity.
Profit and Loss Report – A report that summarizes your income and expenses for the month, so that you can tell whether you’re operating at a profit or a loss. The report shows subtotals for each Income or Expense account that has been set up. The last (bottom) line shows your Net Income or Net Loss for the month.
#3: Petty Cash
A signed and approved petty cash voucher is always needed in order to reimburse the Petty Cash Fund. When a check is written to reimburse the Petty Cash Fund, the account number(s) to use for the expense account distribution should be all the expense account numbers and amounts based on the petty cash receipts. Ex.-“Office Expense” $49.16; “Auto Expenses” $14.75; “Meals” $36.09. These three individual expense accounts should be listed as the expense accounts, and not Petty Cash.
#4: NSF, Credit Card, and Misc. Fees
These fees are often overlooked and are not subtracted from the company’s checkbook balance. When they aren’t subtracted, the checkbook balance is incorrect and you may run the risk of overdrawing your account by writing checks and not having sufficient funds to cover them. These fees should be recorded immediately as deductions in the bank account register.
#5: Purchase of Machinery, Equipment, and Furniture
Those specific items that will be used by the business for over one year should be coded to the specific asset account entitled “Machinery,” “Office Equipment,” or “Furniture and Fixtures.” They should not be coded to the expense accounts entitled “Office Expense,” “Repairs and Maintenance,” or “Shop Supplies” etc. The bottom-line invoice amount (which includes sales tax and possible delivery charges) should be entered.
#6: Year-End Bonuses
Payroll taxes such as Federal Withholding, Social Security, and Medicare must be withheld from the gross amount of the bonuses. If you’re in doubt as to what should be the gross amount for, let’s say, a $100 net bonus check, please call us before you write the check. When we discover that you didn’t withhold payroll taxes from a bonus check, we’ll have to calculate the taxes for you. You’ll then end up paying the IRS both the employer’s and employee’s portion of Social Security and Medicare tax, which can be avoided.
#7: Loan Payments
When you write a check for a loan or note, the amount paid must be distributed to two accounts—for the loan principal (a liability account) and for the loan interest (an expense account). The breakdown for these two amounts should be listed on a separate amortization schedule. If you don’t have this schedule, please call the lender or your CPA. The loan interest is deductible as an expense on your Profit & Loss statement but the loan principal amount is not deductible on your Profit & Loss statement.
#8: Payroll Tax Payments
When coding the check written for the monthly Form 941 payroll tax deposit, either the account “Payroll Tax Deposits” or else “Payroll Tax Liability” should be used. Both of these accounts are liability accounts. Payments should never be coded to “Payroll Tax Expense,” an expense account. (For QuickBooks users: Use the “Pay Payroll Liabilities” feature).
#9: Credit Card Payments
When coding the check written for the credit card payments, individual expense accounts should be used for the specific items charged – ex. Office Expense, Meals & Entertainment, Repairs & Maintenance, etc. Personal items charged should always be coded to the account “Distributions” (S Corporation) or “Shareholder Loan” (C Corporation).
#10: Sales Tax Payments
When coding the check for the payment of sales tax liability to the state, the account number for the account “Sales Tax Payable,” a liability account, should be used. Do not code these payments to “Sales Tax Expense,” an expense account. (For QuickBooks users: Use the “Pay Sales Tax” feature).
#11: Checks Written For Personal Expenses
Since these expenses are not business expenses, business expense accounts should never be used. Instead, these personal expenses should always be coded to the account “Distributions” (if your company is an S Corporation) or “Shareholder Loan” (C Corporation).
#12: Retained Earnings
Never code any Checks or Deposits to the “Retained Earnings” account. This account should never be used in a transaction, unless your CPA gives you end-of-the-year journal entries to make that will increase or decrease the “Retained Earnings” account.
#13: Miscellaneous Expenses
Don’t code any check amounts to “Miscellaneous Expense.” This is a “hot” item for potential IRS audit. You may need to create a new account for the specific item. If you’re unsure of where to code this item, please call your CPA. It’s always better to be “too specific” than to be “too general.”
#14: Consistency in Recording Expenses
Always be consistent when coding a specific expense amount that could be considered to be ambiguous. For example, when you code a check to pay for auto insurance, be consistent in either using the “Auto Expense” account or else the “Insurance” account. The choice is up to you, but it’s important that you continue to use whatever account that you choose for all other subsequent checks to pay your auto insurance. Another example where you should use consistency is in recording fees for printing checks. Be consistent in coding the check to either “Bank Charges” or else “Office Expense.”
#15: Recording Deposits
When deposits are recorded, be sure to only code receipts from customers as Sales Income. Any other amounts received should be coded to their specific individual accounts. For example, amounts put into the business from shareholders should be coded to “Shareholder Loan” and not to “Sales.” Amounts received as refunds, rebates, loan repayments, etc. should be coded specifically to their specific account.
#16: Recording NSF Checks
If a customer’s check bounces in the current accounting month, then void the customer’s check payment. However, if the customer’s check bounces in an accounting period following the accounting period that it was recorded as a payment, these steps should be followed: (1) Record the bank charge for the NSF check in the checking account register, (2) Record the NSF check in the checking account register. Enter the customer’s name as the Payee, the amount of the NSF check in the payment column, and either Accounts Receivable (accrual basis) as the Account to be debited.
#17: Recording Bad Debts
If a customer’s account becomes uncollectible in the current accounting month and the original sale was recorded in a prior accounting month, a credit memo should be prepared for the specific customer to reverse the customer’s invoice(s).
#18: Non-Deductible Expenses
There are a few business expenses that aren’t deductible when preparing your corporation’s income tax return at the end of the year. These expenses should be tracked separately and include: (1) Penalties paid to the IRS (not Interest, which is deductible). (2) Business gifts over $25 per person per year. These non-deductible expenses need to coded to an expense account called “Non-Deductible Expenses” and should be clearly defined as to what they are for.
#19: Vendor Payments
All payments to vendors for services for $600 or more must be tracked because a 1099 form must be given to them in January of the following year. Be sure to separate amounts paid for services rendered as opposed to amounts paid for reimbursements, materials, or supplies.
#20: Voiding Checks
All checks should be entered in the account register—whether they’ve been used or unused. Be sure that the monthly numerical sequence of checks is accounted for by including all voided checks and checks held but not yet released. These checks should be recorded with zero amounts until they are released.
If you’re still confused, don’t panic — call our office today at (727) 391-7373. We’re only a phone call away.