What is the Difference Between Cash and Accrual Accounting?

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You've probably heard of these two terms when researching small business bookkeeping... accrual-basis and cash-basis.

All business owners must decide when starting their company whether they want to use the cash method or the accrual method for reporting their financials. I am here to give you the breakdown of what the difference is between the two (and probably try to sway you in the direction of accrual if I can). 

CASH BASIS BOOKKEEPING

The simplest method. Best for very small businesses with straight-forward sales or personal bookkeeping. Not ideal for analyzing income and expenses month to month.

The cash accounting method essentially records income as it is deposited into your bank account, and records an expense as it is withdrawn from your bank account.  There is no A/R or A/P when using this method, everything is based off of cash-in and cash-out and recorded immediately. 

This can be a major drawback when you want to review your monthly P&L report since it will not be a TRUE representation of what you make or spend in a month. This is because you might get paid for a job in May, but not actually do the work until June. On a cash-basis system the income will be shown as May income. 

Although most businesses are required by law to use an accrual system, some small businesses may be able to utilize a cash system if their sales are less than $5 million a year. It's smart to always check with your accountant if you are one of the small businesses who qualify for cash-basis since switching from cash to accrual can be quite the task. 

ACCRUAL BASIS BOOKKEEPING

More involved method. Best for businesses who want to analyze their financial data and profitability. Most businesses use this method. 

The accrual accounting method records income and expenses as they occur, not when cash is moved.  Simply put - this means that if you get paid for a sale in May, but do not deliver the product until June, you do not get to claim the income until June. This is because no transaction occurred during May - only cash was deposited. 

Note that it's important to ALSO manage cash flow at the same time while using the accrual method because it does not accurately represent how much money is actually in your bank account at any given time. We can see this in the example above. 

Accrual gives you better insight for budgeting and analyzing. Lenders are more willing to let you borrow because you show consistent income. It will also let you see the best times of the year to do marketing campaigns based on previously trending high sales months/seasons. In addition, your business can accrue expenses over time instead of taking one big hit. 

SUMMARY

At the end of the day, it really is dependent on your specific business and business plan. There are advantages and disadvantages to both (however, I would argue that knowing your profitability is a HUGE advantage!). 

-Adrienne

What is Retained Earnings Anyways?

Simply put, retained earnings is money kept within the business.

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Retained earnings is a cumulative representation of your business income that has been (and is currently being) reinvested back into the business. This means the number will continue to grow over time. This also means that it does not include any outgoing money leaving the business used to pay owners or pay dividends. 

For all you math people out there, here is how to calculate retained earnings:

Retained Earnings = Beginning Retained Earnings + Net Income - Owner Draws/Dividends Paid

Why track retained earnings? It's a good way to measure business value (plus, it is something that investors will definitely want to see). Generally speaking, it signifies the financial health of your business from year-to-year as well as throughout its lifespan.  Remember it is a cumulative number!

Where do you find it? Retained earnings is found on the balance sheet under the 'shareholder's equity' section. At the end of each accounting year, retained earnings are calculated using the formula above. This number will either increase or decrease the accumulated retained earnings by however much was retained (or not retained) during the year. 

If you have any other questions about retained earnings, or any other accounting concepts, feel free to reach out!

-Adrienne

Reduce Your Stress About Bookkeeping!

Small business owners and self-employed individuals all know how daunting bookkeeping can be. Organizing your business finances often lingers in the background until the dreaded... tax time! Bring on the headaches, receipts, numbers, and trying to remember why you transferred out that money eleven months ago (let alone remember what you had for dinner last week). 

This kind of stress is not good for your health, or your business' health! The number one stress reduction for small business owners can often be to outsource their bookkeeping, even if it's just a monthly review by a consultant. If you are fully committed to your books, however, here are some tips to remember that will keep the stress levels down.    

Keep track of you 1099 employees from the start.

QuickBooks and Xero offer 1099 tracking for your independent contractors. Classifying these individuals as 1099 employees from the start will make tax time that much easier. Don't put yourself in the situation of backtracking through your checks in order to find out what you paid to whom. Both platforms have the ability to summarize the amount of compensation paid during the year for each contractor so that it is easy to report. (Be sure to enter social security numbers and contact information for contractors as well!)

Categorize everything!

Categorizing is your BFF when it comes to organizing your income and expenses. It's totally up to you with how specific you want to get with parent accounts and sub-accounts, but the primary goal is to have everything clearly sorted. Multiple income streams should absolutely be separated, along with whichever expense categories that are relevant to your industry. 

Reconcile Every Single Month

One of the biggest mistakes I see small businesses committing is not reconciling their accounts each month, or at least each quarter. An even bigger mistake is to leave a discrepancy - there should not be even a $0.01 difference between what's in the bank and what's in the books. If there is, the DO NOT reconcile. It's best to find the source of the problem ASAP so it can be fixed. 

Move to a Cloud-Based Bookkeeping System

If you haven't done this already, it's probably time. The ease and convenience of being able to access your books from any location remotely is a major stress reducer. No more being tied down to a desktop file - most platforms now offer on-the-go mobile apps as well. Everything nowadays seems to be moving to the cloud, and disregarding tech trends can be a huge business stressor and detriment. (This is also a good excuse to move your filing system to the cloud!)

Nobody likes being stressed. Especially not when money is involved. Save yourself the worry in 2017!

-Adrienne

Office Supplies vs. Office Expense vs. Office Equipment - What's the Difference?

These three categories are often and easily confused! It's important to correctly classify your office expenses, supplies, and equipment to make things easier for tax time.

Your office expenses can be separated into two groups - office supplies and office expenses. The third, large office equipment or furniture, should each be classified as a fixed asset to be depreciated over time.

Here's a breakdown:

OFFICE SUPPLIES + SMALL EQUIPMENT (Expense Account)

These are tangible items you need to refill - think staples, paper, printer ink, pens, coffee, uniforms, etc. Small equipment purchases that are generally under $200 can also be categorized here since they are not material.   

OFFICE EXPENSE (Expense Account)

This covers most other business expenses that are necessary to function and are often intangible. For example - utilities, software subscriptions, accounting software subscriptions, postage, cleaning services, etc.

When creating your chart of accounts, you can choose to either differentiate office supplies from expenses, or group them all into one expense account. That being said, it can be nice to see everything clearly and distinctly separate.

OFFICE EQUIPMENT / FURNITURE (Fixed Asset)

Any big equipment or furniture pieces that are generally over $200 and are being used for more than one year. Examples include computers, major software programs like Photoshop, desks, printers, etc. These are all individual fixed assets that cannot be 100% expensed in the year they were bought.

Ask your accountant at the end of the year how these should be expensed. In the meantime, you can create a 'Office Equipment + Furniture' fixed asset account to keep track of all office asset purchases for the year.  

There you have it - a rundown on the difference between office supplies, office expenses, and office equipment! Let me know if you have any additional questions, I'd be happy to answer them for you. 

-Adrienne

How to Enter Multiple Payments on a Single Subcontractor Invoice

Here are the steps for applying partial payments to a single purchase order or invoice from a subcontractor or vendor. 

1. Create a purchase order.

The first step is to create a purchase order if you haven't already. Go to the Add (+) icon in the top right hand corner and select Purchase Order under the Vendors category. If an error message appears you may need to turn on the purchase order function. To fix this, go to settings > expenses > select 'use purchase orders'. Click done. 

Now onto creating the purchase order. Click on the Add (+) button on the top right corner of the screen and select Purchase Order again. This will bring up a new purchase order where you can enter the invoice details that were sent to you by the subcontractor. Enter all pertinent information including the TOTAL amount due on the invoice. Click save and close. Here's an example. 

2. Create and pay bill. 

Click on Vendors on the left side of you screen. A list will appear with all open purchase orders from your subcontractors. Find the one you are making a payment on and click 'create a bill' on the right side of the item line. 

Next, you need apply the correct purchase order to the bill. All open purchase orders will appear on the right side. Find the purchase order you are wanting to make a payment on and click 'add'. Now the bill and the vendor account are linked. 

THIS is the important step - this is where you make the partial payment. Scroll down to where it says Item Details and change the 'Rate' amount to your partial payment amount. You can see below that I changed the 'Rate' amount to $10,000. Instead of paying the full amount due of $20,000, I am only making a first payment of $10,000. Click save and close.

3. Check the A/P by Vendor report. 

To make sure everything worked smoothly, click on Reports on the left side of your screen. Then select the 'All Reports' tab. One of the reports near the top should be titled Vendor Balance Summary. Select 'Run'. This is where you will be able to see your open balances owed to your subcontractors or vendors. You can see that mine says $10,000 which is correct. 

You can also run the Vendor Detail Summary report if you'd like to see your open purchase order amounts in greater detail. 

There you go! That's how you apply partial payments to a single purchase order from a subcontractor. The QuickBooks Desktop process is very similar and I'd be happy to show anyone who needs some help! 

Feel free to contact me if you have any questions via contact@inlineaccounting.com. 

-Adrienne

The Basics of Nonprofit Bookkeeping

I found this AMAZING basic overview of nonprofit accounting concepts. If you are looking to understand how nonprofits differ from for-profits, this is a great starting point. 

The slide-share covers...

1. Purpose and Ownership
2. Side-by-side Comparison of Nonprofit vs. For-Profit
3. Financial Statements Differences
4. Unrestricted, Temporarily Restricted, and Permanently Restricted Net Assets
5. Program and Supporting Services Expenses

Big kudos to Fransy Russey, CPA for creating this simple and straightforward explanation. 

The Pros of Having a QuickBooks or Xero Consultant

Many business owner prefer to manage their own books. This could be a decision based on being cost effective, already having a basic understanding of accounting, or simply just a privacy preference. That being said, there are some MAJOR benefits to having a go-to consultant for your bookkeeping platform. 

1. You get a discount. 

Your consultant should belong to the partnership program of whichever platform you utilize. Ex: QuickBooks ProAdvisor, Xero Partner. This partnership program allows accountants and bookkeepers who have successfully passed training and certification to pass on billing discounts to you. This means extra savings for you simply partnering up with a consultant. 

2. You get immediate help when stuck. 

If you already have a consultant that you are partnered with, you have a go-to person available to assist with whatever issue you may be stuck on. Instead of spending extra time researching a solution you can simply contact the consultant and have the issue resolved in a more timely, efficient manner. They say time is money, right?

3. You get a second set of eyes.  

Having a second set of eyes reviewing your numbers will NEVER hurt. Especially if that person is experienced in business bookkeeping and accounting. Consultants have a keen eye for recognizing irregular number trends and providing total cash management that can save your business money. 

4. You develop a relationship. 

When choosing a doctor, you want someone who is familiar with you and your medical history. Developing and maintaining a relationship with a consultant only gets better with time since this person will know the specific and individualized business needs of your company as well as any business partner. 

There are a number of pros to having a go-to QuickBooks or Xero consultant - and building this relationship sooner rather than later is even more beneficial. They are essentially there to help you manage your business financials effectively and efficiently, but with a more personal touch than any other dial-in help line can offer.

-Adrienne

What is Cloud-Based Bookkeeping Anyways?

We've all heard about the "cloud". There was even a comedy movie created around the mystery of it (I'm looking at you Cameron Diaz and Jason Segal). Okay - that movie might not have been based off cloud-based bookkeeping, but it's still the same idea. If you are a business owner or entrepreneur who really isn't sure what this cloud-based bookkeeping thing is and why everyone is moving to it - please read on. 

1. What is cloud-based bookkeeping and why is it different/better?

Cloud-based bookkeeping is the future - just like how everything else is pretty much moving towards being stored in the cloud (ex: our music, photos, Google calendars, etc.). Cloud-based bookkeeping means you access your company's books from ANY location by simply logging into your account on a website. There is no exported file to copy from one computer to the next, you simply have access to your books at all times with no hassle. This also opens up a huge advantage of not being tied to a physical computer and instead having your bookkeeper, accountant, or yourself work remotely. 

2. There are two big players in the cloud-based bookkeeping world: QuickBooks Online and Xero

You have probably heard of QuickBooks Online considering the majority of U.S. businesses use QuickBooks as their go-to accounting software. It is the old faithful QB desktop version, but revamped to be simpler, more user-friendly, and not a downloadable software - it's a website. Xero is the up-and-coming program that has gained massive popularity in England, Canada, Australia, and New Zealand. It is similarly accessed through a website and argues to have more 'bang for your buck' than other alternatives and a cool name. 

3. Now What?

Consider making the change! Staying up-to-date with technology is extremely important for business success. Not only does it create a more efficient accounting system, it's also easier - all you need is an internet connection. It also takes away the worry of data loss due to a computer crash which ultimately saves time and money for your business.  

We can help with the transition to a cloud-based bookkeeping software and make it THAT much simpler for you.

- Adrienne