What Accounting Basis means for your business
Deciding on which basis of accounting to use for your business will determine how you record your transactions in any given period. Of the several methods, whichever is chosen, the business owner must be consistent in its use thereof for tax reporting and bookkeeping purposes. In order to change, they must file a request with the IRS. The most common bases of accounting are the accrual basis, the cash basis, and the income tax basis.
The accrual basis of accounting records transactions in the same period of which the related transaction occurs, regardless of whether cash is received or not. For instance, if you purchase equipment in 2009, but don’t pay for it until 2010, under the accrual method you would still include the purchase on your books for 2009. The purpose here is to match the income and expenses in the same period. The IRS has clearly defined tests that outline these events. For instance, income is considered earned on the earliest date of these occurrences:
• When you receive payment.
• When the income amount is due to you.
• When you earn the income.
• When title has passed.
And expenses become deductible when:
• The all-events test has been met. The test is met when:
- All events have occurred that fix the fact of liability, and
- The liability can be determined with reasonable accuracy.
• Economic performance has occurred.
The cash basis of accounting records transactions when cash is collected or paid. Using the same example above is you purchase equipment in 2009, but don’t pay for it until 2010, under the cash method you would include the purchase in 2010, when cash is paid. Income includes amounts that you actually or constructively received and expenses include amounts that you actually paid or contest owing. But it does not include amounts that were paid in advance. Expenses paid in advance must be capitalized or recorded as assets.
The income tax basis of accounting is the method used to file your taxes. It’s a combination of the cash basis and the accrual basis. Although businesses are allowed to take this approach, the IRS does impose restrictions on its use. Some of those restrictions would be:
• If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales.
• If you use the cash method for reporting your income, you must use the cash method for reporting your expenses.
• If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income.
Whatever method you choose to report your income and expenses, it must be held consistent throughout. Just remember to choose a method that best reflects your reporting of income and expenses.
Partnering for your success!
Jacqueline Williams
Financial Strategist
Hooray for Ratios: The analysis paralysis of financial statements
Analyzing your company’s performance is crucial to making determinations surrounding your investment activities. The objectives you define are generally based on your company’s current and past financial performance. If you’ve ever heard of benchmarks, then you know that the results you determine from your analysis are useless unless you have something to compare them too. Analyzing your company’s financial activities involves using specific methods of investigation. Ratio analysis involves studying the relationship between two or more items on your financial statements. With ratio analysis you’ll be able to make key financial decisions such as; which areas need improvement, which areas are profitable, are you meeting your cash requirements, and are you meeting your obligations. The most common of these analysis are:
Current Ratio
Inventory turnover Ratio
Profit margin on sales
Days sales outstanding ratio
Debt to total assets ratio
Current Ratio
This ratio determines is a company is able to meet its current obligations. In other words, are you able to pay off your current liabilities? Typically a current ratio of 2:1 states that a company is able to meet its current obligations. Also known as the Quick Ratio, it is calculated by dividing current assets by current liabilities.
Inventory Turnover Ratio
This ratio evaluates your inventory and states how many time in a year your inventory is sold or replaced. A low ratio would imply that a company has excess inventory on hand. For example, if a company has an inventory ratio of 6.3, this would mean that inventory would have to be restocked at least 6 times in a year. In this example, sales are good because your products are moving. This ratio is calculated by dividing Cost of Goods sold by the average inventory. The average inventory is calculated by adding the beginning and ending inventory balances and dividing this total by two.
Profit Margin on Sales
This ratio determines how profitable a company has been. It is calculated by dividing the Net Profit for the year by total sales. When compared with prior periods, this ratio is revealing in that shows whether a firm is operating efficiently and able to compete successfully with its competitors. For example: if your net profit is 1,000,00 and your sales are 15,000,000,then your profit margin would be 6.67%. This means that for every dollar of sales, your company made .06 cents profit. When calculating this ratio be sure to reflect net profit which deducts cost of goods sold along with operating expenses.
Days sales outstanding ratio
Based on daily sales activity, this ratio determines how long it takes to get paid after making a sale. It is calculated by dividing the accounts receivable by the average sales per day. It’s important to monitor this ratio closely as it directly affects your cash flow.
Debt to total assets ratio
This ratio represents the total debt as a percentage of total assets. It is calculated by dividing total liabilities by total assets. A low ratio indicates that a company is more likely able to pay its creditors with a reduction in assets, whereas a higher ratio would mean that it would hurt the company to reduce its assets in order to make its payables.
There exist over 20 various ratios that company’s can use to examine and evaluate their financial standing. Using ratio analysis allows you to make decisions concerning credit, management style, and whether the processes chosen are effective in accomplishing the company’s goals.
Partnering for your success
Jacqueline Williams
Financial Strategist
DESIGN A BOOKKEEPING SYSTEM THAT WORKS FOR YOU
Your company’s financial records are the window into the soul of your company. Developing a system should be one the first tasks on your agenda when establishing your company. Of course, most of us wait until we’ve begun operations, and then we accumulate a mound of paperwork. At this point, either one of two things happen; you ignore that mound until you can’t ignore it anymore, or you’ll pass it off to someone else to handle for you. That’s why it’s advantageous to create your system in the beginning of your operations. You’ll save time and money.
Your bookkeeping system should be designed specifically for your type of industry and it should be modified to represent the uniqueness of your particular company. If designed correctly, your bookkeeping system will not be too complex and it will provide you with pertinent financial data at the click of a mouse. To set up the proper system for your company a Bookkeeper will ask a series of questions to gain insight into the type of business you have, and from that information he/she will be able to advise as to the type of transactions and the establishment of the chart of accounts. In the beginning, your chart of accounts will provided very basic data due to the fact that not a lot of activity is occurring at that point. However, it should contain the necessary information for financial reporting and tax reporting. As your company grows, so will your chart of accounts. Your bookkeeping system should be flexible in that it needs to accommodate the addition of various financial statements that management would use such as a balance sheet, an income statement, budgeting, cash flows, etc.
Creating accounts and posting transactions are not the only components of a good bookkeeping system. A good system will include controls to make sure that the data captured and presented is done accurately. For instance processing cash receipts, paying bills, and entering invoices; all these tasks should be clearly documented as to the responsible party, the actual procedures involved, and the responsibility for the review of or oversight of these functions. And most importantly, automation is key. Although you may feel that in the beginning it’s not necessary, do yourself a favor today and make sure that your bookkeeping system is automated. Manual bookkeeping systems are outdated and inefficient. Automated systems provide a higher degree of accuracy, and prevent you from having to set up ledgers, journals and accounts that you aren’t familiar with.
It’s not too late to give your current system an overhaul. Have your Bookkeeper review it today!
Partnering for your success
Jacqueline E. Williams
Financial Strategist
Monthly Bookkeeping For Success Tele seminar
Each month Bookkeeping For Success hosts a tele-seminar with successful, innovative, motivated small businesses who are focused on creating an effective system for their bookkeeping.
March’s topic is
“Time Management Techniques using Quick Books”
This tele-seminar will introduce the concepts of time management and its techniques to help you manage your bookkeeping process better while using Quick Books.
You are welcome to email questions in advance to: eworkshop at jefinancialservices.com. In addition, we will provide an opportunity for you to ask questions during the tele-seminar.
Here are the details….
Date: Wednesday, March 25, 2009
Time: 4:00pm EST, 3:00pm CST, 2:00pm MST, 1:00pm PST
Reserve your seat at: Bookkeeping Success Tele Seminar Line
All you have to do to attend the tele-seminar series is find a comfortable spot for about an hour, sit back and connect with the Bookkeeping Success Tele Seminar Line. You’ll get to ask as many questions as you want during the seminar and even after. Plus, if you miss a session or the available times are not good for you there’s no need to fret because the entire event is recorded and you’ll have the ability to listen to it at your convenience.
I hope you’ll take advantage of this invitation and I’m looking forward to “seeing” you on the call.
Setting up reminders in Quick Books
With our busy lives it’s hard to remember everything we have to do or every place we need to be. This can be especially true for small business. You have to wear many hats in your profession and sometimes it can be a bit overwhelming. Thank God for technology! Today, many businesses, including individuals, rely on technology to help keep them organized and focused. With items such as Palm, MS Office, and other technology oriented personal assistants, we are able to stay on top of our busy schedules.
In the realm of bookkeeping, many software programs have tools and add-ons to help keep you organized. For instance, Quick Books has a wonderful feature called “Reminders” which helps you to keep track of all the tasks you perform in the software. It shows pending items such as outstanding bills and customer invoices, items you need to act on, and also, as the name states, items you need to be reminded of. This feature will also posts notices or alerts about any QuickBooks business services that need your attention, such as software updates. This is an excellent tool for making sure that certain repetitive tasks are handled.
Setting up this feature is very simple to do.
Log into QuickBooks and open your company file
- Go to the Edit menu and click Preferences.
- In the Preferences window, click Reminders in the list on the left.
- Click the Company Preferences tab.
- For each type of task listed, choose a preference: Show summary, Show list or Don’t remind me.
- For date-driven events, enter the number of days in advance that you want QuickBooks to add a reminder to the list.
- To have the reminders window open every time you start QuickBooks, click the My Preferences tab and select the Show Reminders when opening a company file checkbox.
- Click OK.
At this point you are ready to use the list. On the company menu, choose “reminders”. Once here you can view, add, or modify existing reminders. Keep in mind, this feature is only as useful as the information you place in it. It would be a good practice to set this up at the start of your file, and each time a new event occurs, update it accordingly.
There we have it! Another Bookkeeping Success profile to help you manage your records effectively!
Partnering for your Success
Jacqueline Williams
Financial Strategist