2. Bookkeeping and accounting

2. Bookkeeping and accounting

If you get paid, congratulations! You have created something for which the people that have wished are willing to pay enough money. To ensure your healthy business stays, and help you focus more on business than on keeping the lights on, you want to save money you move in and out of your business. Home to the fascinating world of accounting and bookkeeping.

What is accounting? What accounts?

Historically, there was a distinction between the functions of accounting and bookkeeping, but the distinction is weakening as more than two functions are done by computers rather than people.

Accountability records details about the transaction books (Registers) of the company. It has been historically seen to be work done by the retail-oriented specialists, but not something that required a higher degree.

Accountability transforms data in books conclusions about the business health. Part of this function has been largely subsumed by computer program given that books are computerized business, calculating such a report (a report listing assets and current business liabilities) is insignificant.

In most companies, accountants advise on the business structure (egg, how the money flow between a parent company and a subsidiary), design procedures and controls for new transactions which are more complicated than work routine handled by accounting / computer, and advise business owners / managers on financial matters. They also often help with tax planning and preparing tax returns.

What are “books? “

Your business keep many types of discs. One category of these, in which describes the movement of value and out of business, called “books. “The books are tracking the value, not necessarily always money, but for sake of convenience we will talk about money rather than the long list of valuable things business can keep some drives.

The physical manifestation of “books” is different in each case to some companies it is a literal physical book with a record of transactions, to others it is an Excel file, to others it is distributed among multiple different accounting systems.

Each entry in a register has a quantity, description, date, and some notion behind of where the money comes and where it goes. You can think of your bank statement or checkbook register as although relatively simple to your business is likely to have.

Most companies employ bookkeeping double entry, where business keep multiple logical registers, each representing a business account. “Reflects” here may correspond to real bank accounts or to something that it is useful to think about but which is not a physical place of its own, as “income. “The holding of double-books to each transaction recorded twice: as credit and debit account to another.

Bookkeeping double-entry was a revolutionary technology back in the 1400s because it made mistakes and malfeasance less likely than using a simple registry for business. Nowadays computers do most of the actual work and the contractor can probably avoid thinking about the logistics of the accounts that frequently and focus instead on making good decisions about output from the accounting process /accounting.

Separating financial lives

One of the first steps to be taken to establish appropriate accounting controls on your business is to separate your personal life from your business life. It is often difficult early, many entrepreneurs begin with operate the business as an extension of their personal identity. This is natural and expected, but when feasible, you should make a clear division between the money within the business and money out of business.

This has some advantages:

One of the easiest ways to creditors of a company, or others with claims against it, “pierce the corporate veil” is to demonstrate that the company was not genuine business but rather treated as just a separate pocket for the entrepreneur. The “piercing the corporate veil” is legalese for emptying the presumption that society’s responsibilities rest with only the company and not its owners. As the owner of a company, you earnestly want to avoid this event.

The payment of personal expenses out of company accounts or business expenses out of your personal accounts suggests that the company is just a fiction. Since entrepreneurs want to incorporate (and should benefit from) the limitation on liability afforded by incorporation, they should be careful to maintain the distinction.

Besides, it’s just easier operationally if your personal transactions and transactions remain in separate accounts. You have no particular obligation to keep accurate books for yourself, but you do for your business. If each transaction on a credit card is known to be linked to the market, it makes your accounting; if you know for sure that none are linked to the market, then you can spoil this statement without consequences for business.

The execution of discipline on the movement of money between the company and yourself can help external issues before they are insoluble. Companies are complicated; even small businesses can easily have hundreds of transactions in a month. It is very easy to have the incorrect perception that his business doing well while they bleed actually the money. This can happen if you have money coming in and out of your personal accounts all the time, and you might not realize that unless you were paying very great attention to how often you personally support the charges exploitation. This happens even to the very talented entrepreneurs, and this can be a painful realization to wake up to.

Of Internet companies are fortunately well-placed to separate your personal finances, due to what amount of business takes place electronically. If you remember a few simple rules, your business will transfer on to do the right thing. Let’s walk through how you should handle some of the most common transactions.

Ways to simplify accounting

Returned: Open a business checking account as a primary place standing for money for business. Ensure that all income is deposited for business in current account. For example, have the scratch (or your other credit card processor) send money to this account. If you receive checks, drop them into account (rather than cashing).

Doing this will allow you (or your accountants) to quickly sweep deposits in business, which will almost all items of income and match them against your sales.

Non-income deposits: The money comes from time to time in companies for reasons other than “a customer has paid you. “Important examples include investment, entrepreneurs lending money to business, etc. You should keep these transactions as infrequent as possible and properly documented.

Early in business life, when it is not yet positive cash flow, a contractor will often inject money into it. This is fine, assuming you can afford it, but: make this to be as infrequent as possible. The monthly magazine is a good rate for this; multiple times per week is not.

Spending: Open one or a limited number of credit cards. These can be in your own name or in the name of business-business it is often difficult to qualify for credit cards early in the life of your business. Put all the operating costs on a credit card if possible; never put personal expenses on business credit cards.

Do not do the transactions that are mixed in the character; they are painful for accounting later. If you must make a purchase from Amazon with articles related to the market and independent products, make two purchases instead. It may cost you a bit extra shipping (or additional SaaS accounts, or extra time asking a clerk to ring up two purchases at a store), but you save on fees and aggravation compatible. There are many places in your business where your personal attention opens the added value; the answer to the question “was that battery pack you ordered business or personal? “Is not one of them, and n?’

Pay the account of current credit card business, and only current account business.

You should minimize the number of operating costs that occur through any method other than your business credit card, especially cash transactions. If you have refund or an employee, be sure to save expenses and reimbursement.

Of some government agencies, owners, etc. can only be paid by check; use your line banking to write their checks directly to the account current business, or use direct debits or payments ACH to pay them.

Loans business to the entrepreneur: Prefer avoid these. Investors hate because historically they may indicate abuse of company funds. They complicate accounting unnecessarily. They make the story that you and your business are distinct harder to sell. In the best case, you want the flow of cash between business and yourself is unidirectional and relatively uncommon: a monthly pay check, a quarterly distribution, etc. They are easy to explain and have the clear treatment in terms of tax consequences.

The loans become … messy. For example, it is very easy to lose a result of the business loan payments accounting are recorded as fully income (which is incorrect, and increases the tax burden on companies unnecessarily) or considered because income tax by the agency (which is incorrect, but might be difficult to defend against lax accounting data).

If you need credit, get it from a bank. The payment of 18% in April a balance averaging $ 5,000 over a year is a lot cheaper than paying your accountant to answer questions from the IRS about an informal loan is lacking in documentation or extended transaction between the owner and business.

The IRS also has toothy rules regarding the “ready-related party”, which require more documentation than loans received from banks. If you do not maintain this documentation, you can be penalized, not because you had the intention of abusing the loan but simply because you have not followed the rules about documentation.

Talk to your accountant to properly document these loans if you choose to do them. Or save yourself the trouble and just do not borrow money or do not pay at your business without careful consideration.

Cash accounting against the accrual accounting

There are two accounting methods widely used by Internet companies: cash of accounting and accrual accounting. They result in materially different processes involving accounting / bookkeeping and can result in substantial differences in taxes. You likely will select one of the two methods and sticks with it for years at a time. (Both methods involve different ways to keep the books for your company, you must also tell the IRS what method you use when you file your first tax returns for society Changing methods requires both forms of classification. with tax agencies and often a lot of internal work to ensure the transition is explained properly, so you’ll want to avoid it where you can.)

In the cash method, Business records of your income as soon as it will be “available to you without restriction. “It is a term-of-art of the IRS; a simplified view is “if your client thinks they have you paid, you have probably booked income in the amount they think they have paid you. “The income that hit one of your accounts is certainly income as of that instant; checks as of which were sent to you when they are returned are sent rather than when they are received.

Expenditure is similarly simple: you book them when they are actually paid.

Many entrepreneurs start their companies follow the cash method because it is very easy to understand, even for entrepreneurs with no business background.

The accumulation methods more complicated than the cash method. The compromise does is to allow business (and other beneficiaries) to have a more accurate understanding of the true health of the business at any time.

In the accumulation method, income and expenses are recognized when the amount is fixed, known to be (in principle) collectable, and after economic performance occurred.

This means that, for example, if you accept funds for an order but you are not transported, you do not recognize revenue until you were carrying. (You reserve assets for the funds and income from passive undeserved representing the obligation of the company to ship the equivalent value of the goods, then you decrement responsibility when you board and increment the income.) Accounting: easy, once you get the hang of it … but your best time is spent doing almost anything else, and pay someone to do this for you.

Many investors view count books made in the accumulation method because there are a variety of ways to bring through the liquid method of money doing business seem more successful it is actually. The change in its accounting can be done at the end of a tax period, but is a bit of a headache, so if you know you are on the path of investment you might want to start with the accumulation method to save before you revisit all your books a few months down the road.

Terms of justification

Your business is required to power to justify (Provide documentation about the facts regarding) any transaction on your books. You will want to keep organized records, more your books, which will let you quickly answer questions on any transaction.

This is most important for larger transactions or for transactions in some parts at high risk of a tax return, but in principle you need to justify everything.

The IRS does not require that you have any particular style of keeping, only that you are in a consistent manner that leaves you comply with your obligations. The Internet companies usually keep most of their records in one or more computer systems. It is important that you know what information is where you can pull at will, and that your discs are available for the appropriate duration. (Usually this is 3 years after filing the tax return for this year, but there are some exceptions. As a practical matter, the Internet companies should store data indefinitely establishment. The hard drive space is virtually free; it is certainly cheaper than installing a process for routinely take the decision to keep-or-delete about particular documents.)

Justifying income items is quite easy: keep copies of receipts and invoices. (These are described in detail in a later chapter.) If you have particularly large transactions, you probably want to specify the contracts or other documentation certifying the details of what work was actually performed.

Receipts / bills generally will be centralized by nature in your system. If you happen to emigrate systems, remember to save the old receipts / invoices somewhere that does not get wiped after the migration is complete. The organizing annually minimally; it is often useful to be able to order them in the year as a common form of investigation is “your book exhibition by item of income for $ 12,000 on December 3, 2012. Justify it in an appropriate level of accuracy. ”

Justifying the expenditure items are modestly more difficult, because expenses are usually much more varied than income. In addition, some flavors of spending irregularly detailed record-keeping requirements.

You will want to have a policy that any purchase of goods or services your company requires a receipt and / or a written invoice and all receipts / invoices are kept in a central location. Many companies employ received-track or expense-tracking software. A low-tech, but still consistent, way to do this is to establish an email address @ receipts for your company and to require all employees as a matter of policy, to provide receipts or there dispatch received here if published a personally.

If a transaction does not result in a receipt, you should treat this as abnormality. Part of the discipline have received is to force money moving out of the company to come up with documentation justifying; transactions that have no receipts are suspicious by nature and can represent the activity on which your business want to keep down as diversion. Most often the reason is innocuous but nevertheless you should immediately create a written record of the transaction and store it wherever you store receipts / invoices. (Note that the embankment of written records such as credit card statements is not acceptable; IRS wants discs are kept contemporary of the transaction or shortly after, when the details are still fresh and when there is minimal chance to dodge for its tax benefit.)

The paper trail should not be particularly developed for most transactions, particularly small-dollar ones; receipts are generally not that developed, either. You will want to cover that you paid (in an appropriate level of detail that “a man” is not appropriate, “the florist on 3rd Street” is probably, at least for a small transaction), exactly how much was paid, the way of payment (an account, cash, etc.), which was purchased, and his reasoning for not carrying a receipt / invoice.

Number of electronic records as written records, especially when you hold an orderly fashion in the course of ordinary business. If it is in the common habits of your business to keep receipts in the receipts @ send inbox, for example, while an email from two-line to receipts @ is a written record created in the course of ordinary business your company, and it will usually treated with current compliance.

You should keep the statements (and similar documents) for all bank accounts, credit cards, etc. indefinitely. Note that banks may keep statements on their own systems for less time than you want them to be maintained, make a practice of recording electronic copies in a place you order. Banks come out from time to time business; you do not want to have to rebuild an account statement there 5 years simply because you closed the account or the bank was purchased in the meantime.

Travel, transportation, entertainment, and gift expenses are sometimes abused by some taxpayers and therefore have specific terms of record-keeping. You should be especially careful to keep written records for contemporaries such transactions; IRS describes what you need publication 463. A forecast of the next attractions: you should keep a spreadsheet for each employee that shows all the travel dates, where they remained (get receipts!), and what was the commercial purpose for the trip. You should, when you do business entertainment (meals included), register the participants and the specific contemporary commercial purpose information on the transaction; many small businesses simply write it on the back of the receipt.

As with most tax matters, the authorities are trying to be reasonable about the degree ceremony required for small transactions, and it rises as transactions become larger, more frequent, or more material throughout the context of your business. It is unlikely that you have to write much more than “Dan Smith; candidate ; offering discussed employment “if you buy someone $ 20 value lunch; If your New Year party cost your company $ 150,000, run it by your accountant and ask them what the appropriate level of justification.








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