B102.3 > Accounting |
Many people who are not in business falsely assume that Accounting is one of the biggest challenges of business. Truth be told, accounting only represents about 5-10% of being in business, and the actual bookkeeping and tracking of all the math can be one of the easiest, most straight forward, cut and dry parts of a small business if you setup your accounts properly with a healthy accounting strategy in mind and a software solution other than Quickbooks.
Strategies and systems exist for Bookkeeping and cash flow management that make it simple for even the most numerically challenged to feel comfy with their bookkeeping. These systems can be applied to companies that range from $5k in revenue up to $1 Million or more. ( http://www.zap-accounting-software.com )
Given that, we strongly advocate for the affordable use of CPAs for your actual tax preparation and tax advice as opposed to trying to wing it solo or with a discount tax preparer. Your entire Accounting process can be and should be affordable and straight forward.
These systems for small/micro business accounting were developed after many years of familiarity with accounting theory, software options, and after buying bookkeeping and accounting software and services. Once you realize the key to cash-flow management isn't overly connected to bookkeeping, everything starts to get simpler.
Below is an outline for this page:
Section 99 at the bottom is the Real World Stuff you need for operations.
- Accounting generally is just ADDITION and SUBTRACTION.
- If you want to get into sales tax accounting and budgeting and some other stuff, MULTIPLICATION and DIVISION come in handy.
- Come one folks.. this isn't rocket science.
Strategies and systems exist for Bookkeeping and cash flow management that make it simple for even the most numerically challenged to feel comfy with their bookkeeping. These systems can be applied to companies that range from $5k in revenue up to $1 Million or more. ( http://www.zap-accounting-software.com )
Given that, we strongly advocate for the affordable use of CPAs for your actual tax preparation and tax advice as opposed to trying to wing it solo or with a discount tax preparer. Your entire Accounting process can be and should be affordable and straight forward.
These systems for small/micro business accounting were developed after many years of familiarity with accounting theory, software options, and after buying bookkeeping and accounting software and services. Once you realize the key to cash-flow management isn't overly connected to bookkeeping, everything starts to get simpler.
Below is an outline for this page:
- Formal Definitions
- Formal Curriculum
- Important Questions for Understanding
- Discussion -- Two Types of Accounting
- Discussion -- Accounting Basics
- Discussion -- Tax Accounting with a CPA
- Discussion -- Bookkeeping vs Accounting
- Discussion -- The Illusion of Complexity Related to Accounting and Bookkeeping
- Discussion -- The Risks of Not Doing your own Bookkeeping
- Discussion -- Quickbooks - The Nightmare that just never ends...
- Discussion -- The Bookkeeping Secrets that you have been missing...
- Discussion -- You need to...
Section 99 at the bottom is the Real World Stuff you need for operations.
1) Formal Definitions
Accounting (noun)
Source: Google "define x"
- The action or process of keeping financial accounts.
Source: Google "define x"
2) Formal Curriculum
One of the most beneficial college subjects for many is Accounting 101, but only if you have a good teacher. That said, it's shocking how many folks can finish the course and not do the bookkeeping for a small business.
The information below was taken from an online course that had a nice breakdown of topics...
The information below was taken from an online course that had a nice breakdown of topics...
Introduction to Financial Accounting (Tax Accounting)
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Introduction to Managerial Accounting (Cost Accounting)
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3) Important Questions for Understanding
- What is the difference between Tax Accounting and Cost accounting? (And this is the same as saying, "What is the difference between Financial Accounting and Managerial Accounting")
- Do you know what GAAP is?
- Do you realize there is no "right" or "wrong" way to do accounting?
- Do you realize if you do more accounting than you need to do for tax purposes, that comes at a cost of time, energy and attention that may not be necessary?
- Do you know what double entry bookkeeping is and why double entry bookkeeping is relevant?
- Do you know what an Income Statement is?
- Do you know what a Balance Sheet is?
- Do you know how the Income Statement and Balance Sheet represent a check and balance for each other?
- Do you know what Schedule C is?
- Do you know what expense line item on Schedule C is different from all the rest and why that is very relevant to doing bookkeeping and Tax Accounting?
- Do you realize our corporate tax system is honor code based?
- Do you know what is involved in an Audit and how to best to protect yourself from an audit?
- Do you know the difference between the terms "Bookkeeping" and "Accounting"?
- Do you know why you should really use a CPA for tax preparation? Do you know how much that should cost?
- Do you know how or why bookkeeping and accounting have become mystified as being complex?
- Do you know the risks of not doing your own bookkeeping?
- Do you know the benefits of doing your own bookkeeping?
- Do you know what makes Quickbooks so bad?
- Do you know the secret way to do your books that is faster and more powerful than Quickbooks with no cost and more flexibility?
4) Discussion -- Two Types of Accounting
There are two types of Accounting in my world...
Cost Accounting is accounting for your own personal use. It is done to assist you with assessing all aspects of your business as you deem worthy of watching.
The primary difference in these two accounting systems is related to the "category" that you assign to each transaction, and the goal of the accounting process. That's it. Nothing more.
Tax Accounting vs Cost Accounting
Do you fully understand the minimum requirements for reporting income for Tax purposes? Do you realize the amount of accounting needed for reporting taxes is actually very minimal? Do you fully understand that not even the IRS expects perfection with your accounting?
Do you fully understand that all accounting done beyond Tax Accounting is only for your own use?
Do you know how much accounting you should be doing and what the best way is to do it?
- Tax Accounting (aka Financial Accounting)
- Cost Accounting (aka Managerial Accounting)
Cost Accounting is accounting for your own personal use. It is done to assist you with assessing all aspects of your business as you deem worthy of watching.
The primary difference in these two accounting systems is related to the "category" that you assign to each transaction, and the goal of the accounting process. That's it. Nothing more.
Tax Accounting vs Cost Accounting
Do you fully understand the minimum requirements for reporting income for Tax purposes? Do you realize the amount of accounting needed for reporting taxes is actually very minimal? Do you fully understand that not even the IRS expects perfection with your accounting?
- Tax Accounting is accounting for the IRS and the tax collectors. In larger organizations it is relevant for the investors too. Cost Accounting is for your own use only. Most responsible companies or businesses do both to some degree, even though Tax Accounting is the only one that is truly required
Do you fully understand that all accounting done beyond Tax Accounting is only for your own use?
- The difference between Tax Accounting and Cost Accounting is simply related to the categories assigned to various transactions and the goal of the accounting process. In one system you will use one set of categories and in the other system you will use a separate set of categories that makes more sense for your analysis/reporting needs.
Do you know how much accounting you should be doing and what the best way is to do it?
- If you had a list of transactions in a spreadsheet with two empty columns to the right, one column being for a simplified category the government wants to see for Tax Accounting purposes and one column being for a category more suited for your own insight into your business, you would have a perfectly functional accounting system or accounting software for both Tax Accounting and Cost Accounting (as long as there was a Balance Sheet cross check).
5) Discussion -- Accounting Basics
Accounting Basics -- Tax Accounting is a Self Reporting system for Tax Burden
First and foremost, most who are not in business are typically oblivious to the level to which Sales Tax reporting and Business Income tax reporting is in fact a self managed situation. The level to which people cheat at reporting both of these items is rather astounding. If you believe in an evil government, one who openly says they want small businesses to thrive, but one that then does everything they can to deter small business, I could make a claim that part of the reason for the evil back slap is to get back for the total lack of control of tax collections from small business people.
First and foremost, most who are not in business are typically oblivious to the level to which Sales Tax reporting and Business Income tax reporting is in fact a self managed situation. The level to which people cheat at reporting both of these items is rather astounding. If you believe in an evil government, one who openly says they want small businesses to thrive, but one that then does everything they can to deter small business, I could make a claim that part of the reason for the evil back slap is to get back for the total lack of control of tax collections from small business people.
Accounting Basics -- GAAP is an acronym for Generally Accepted Accounting Principles
Do you realize there really is no "right" or "wrong" way to do a lot of things related to accounting?
Do you realize if you do more accounting than you need to do for tax purposes, that comes at a cost of time, energy and attention that has no benefit?
Accounting Basics - Double Entry Bookkeeping, Income Statement, and Balance Sheet
Do you know what double entry bookkeeping is and why Double Entry Bookkeeping is relevant?
Do you realize there really is no "right" or "wrong" way to do a lot of things related to accounting?
- GAAP is what Accountants use to determine if bookkeeping and accounting was done in an acceptable manner, and it provides guidelines for accounting but there is often a lot of leeway in those guidelines. As long as there is some reasonable system for checks and balances, it's likely an okay way to do your accounting.
Do you realize if you do more accounting than you need to do for tax purposes, that comes at a cost of time, energy and attention that has no benefit?
- When it comes to accounting, you need to do enough to stay out of trouble with the IRS and local tax agencies (accounting and business law) and enough to give you reporting that satisfies you and not one ounce more.
Accounting Basics - Double Entry Bookkeeping, Income Statement, and Balance Sheet
Do you know what double entry bookkeeping is and why Double Entry Bookkeeping is relevant?
- Double entry bookkeeping requires that every transaction gets recorded against two track-able accounts. This double entry system creates a system of checks and balances that makes it very difficult to manipulate accounting in ways that single entry bookkeeping is susceptible too. In general double entry bookkeeping helps protect business owners from thieving accounting employees and it helps the government make sure that those reporting their own earnings are reporting things correctly. But it only helps if you look in detail at the accounts used and verify there are no illogical adjusting accounts not showing or showing in the process.
Do you know what an Income Statement is?
Do you know what a Balance Sheet is?
Do you know how the Income Statement and Balance Sheet represent a check and balance for each other?
- An Income Statement is also refereed to as a Profit and Loss Statement. It lists all the income for a given time period, all the expenses for the same time period. The difference between those two represents ones "Net Income" or Loss. Net Income is also referred to as ones Profit.
Do you know what a Balance Sheet is?
- According to modern lore, a Balance Sheet is a report that shows all your Assets, Liabilities and Owners Equity for a given date/time in history. That's only half of it. The Balance Sheet is really comprised of two company net worth statements, calculated two different ways to cross check each other. One is a snapshot for a fixed date, the other is a relative bring to date from the last time the report was generated. It's far from what it's been advertised as in all relevant accounting literature. And that should have you really scratching your head.
Do you know how the Income Statement and Balance Sheet represent a check and balance for each other?
- The income statement is part of the relative bring to date report mentioned above, and that's how it provides a cross check to a current snapshot. All of this is explained in greater detail at ZAP Accounting Software.
6) Discussion - Tax Accounting with a CPA for Tax Preparation and Support
For many people, just doing their tax accounting properly gives them a good enough view at their accounting that no further categorization is necessary.
Tax Accounting -- Only one Expense Category Designation is Critical and that's because it counts at 50% only...
Schedule C is the form most small business people are familiar with for reporting corporate income, expenses and inventory levels. On Schedule C, there are about 12 standard categories they want you to use for reporting of expenses, and here's the kicker... there is only ONE category out of those 12 which doesn't count the same as the rest and that is the Business Meals and Entertainment category. So the point here is simple -- if you mis-categorize a basic expense, as long as it isn't related to Business Meals and Entertainment it has no affect on your tax burden and as such, the perfection of your accounting when it comes to Tax Accounting is almost totally irrelevant. There are some larger expenses that need to be amortized over time, so you need to be mindful of that too, but if you forget that, your accountant will likely catch those as they will typically cause individual expense categories to stand out abnormally.
Tax Accounting -- Use a CPA (Certified Public Accountant) for Tax Preparation and Tax Filing
Licensed Accountants, known as CPA's (Certified Public Accountants), are individuals who studied Accounting in a four year college program and then they passed a series of tests which earned them the title of "Certified Public Accountant".
Do you know why you need to be paying for a CPA's services for Tax Preparation?
- As of this writing, it seems that $400 is the going rate for a relatively simple small businesses tax preparation (and that is for personal taxes with a Schedule C). There is almost no better money spent for insurance, which is what you are really buying.
- By using a CPA you are effectively buying insurance against an audit. Should one transpire your CPA should be willing to represent you at low to no cost.
- If you are using a Tax Preparer to do your Taxes the most you could save is the amount between their fees and $400 and that savings does not, make sense given the level of insight a CPA has into the tax code.
- You will likely NEVER properly save money on taxes by doing them yourself. Never. And the time you might spend doing them will be much better spent doing whatever it is you do for a living.
Tax Accounting -- IRS Audit
Tax Accounting -- Do you know what to look for in an Tax Accountant?
- Do you know what can trigger an audit?
- Do you know what may be asked at a time of audit?
- Do you realize why a Professional Account for your Business Tax needs should be considered by you as a requirement and not an option and why it's worth every penny assuming you are paying a reasonable rate for services?
Tax Accounting -- Do you know what to look for in an Tax Accountant?
- Look for someone who is a licensed CPA (vs a non licensed Tax Preparer) who you feel comfortable talking to and who will represent you at low to no cost in the event of an audit. You do not want a tax preparer who acts like a jailer and is constantly telling you to do things that are not realistic (like "prove all the miles on the car were business miles" -- an impossibility that a CPA told someone in 2019).
7) Discussion -- Bookkeeping versus Accounting
Bookkeeping is the act of recording transactions, assigning categories (tax accounting categories, cost accounting categories or both) and reconciling monthly bank statements. It may also include writing checks for expenses and being involved in the Accounts Payable and Accounts Receivable portion of a business.
Accounting is the act of using the information generated/created by the Bookkeeper for the purposes of Tax Accounting (filing taxes) and Cost Accounting (using the accounting information for insight into your business operations).
Bookkeepers vs Licensed Accountants (CPA's) vs untrained employees for Bookkeeping
A bookkeeper is someone who might enter receipts into an accounting ledger or software and they might write checks for bills. A bookkeeper also might reconcile bank statements at the end of the month. Bookkeepers often might charge anywhere from $30-60/hour. Horror stories exist where bookkeepers have taken advantage of unknowing victims at an unconscionable rate of $100/hour. Bookkeepers do not by default have a college degree or any formal certifications. Bookkeeping is a trade just like carpentry or bar tending.
An Accountant certainly could offer bookkeeping services, but the hourly rate they make for doing bookkeeping is (should be) lower than what they make if they can stay busy doing accounting related tasks, as such they often times look down some on doing bookkeeping or they sub out the work they bring in. Bookkeeping also pulls accountants into the crazy and chaotic world of their clients to a degree that some prefer not to know about.
As for using a random employee for Bookkeeping, if you are well versed in the trade and if you train them on how to do it and if you have systems for checking their work (proper checks and balance systems in place) it can be a time savings and cost savings if you are using cumbersome software. But truth be told, if you learn to do bookkeeping with spreadsheets, and if you setup systems for simplifying your transactions and transaction count, the time it takes to do it yourself just isn't significant enough to warrant the help. And if you do NOT know how to do your own books, using untrained employees is a real no-no. The results of that can be extremely ugly.
In general, we try to discourage anyone from paying bookkeepers or accountants to do your bookkeeping until you know how to audit their work. Doing your own books, once you understand the simple ways to do them, is your connection to your monetary flow of your business. If you don't have the skills or time to do your own bookkeeping, especially after you learn how it's done quickly, you likely don't truly have what it takes to be in small business.
8) Discussion -- The Illusion of Complexity Related to Accounting and Bookkeeping
Complex Accounting is Job Security for Bookkeepers and Accountants
Bookkeepers and Accounts find job security in setting up and helping you maintain complex accounting systems.
As a business owner, you are never going to "make profits" from doing your books and your accounting. Accounting is a necessary part of being in business and proper reports can shed light on things that may not be intuitive. Truth be told, you can typically glean the information that accounting reports can provide in simple ways outside of formal accounting systems.
Quickbooks and Other Accounting Software
In general, Accounting software is bloated and overly complex. Few companies have been able to compete and gain traction against the Monopoly called Intuit, which controls the accounting software space for small business. By keeping things complex, Intuit has maintained a user base of Millions who could mostly be set free with a simple spread sheet if word ever got out. ( http://www.ZAP-Accounting-Software.com )
Bookkeepers and Accounts find job security in setting up and helping you maintain complex accounting systems.
As a business owner, you are never going to "make profits" from doing your books and your accounting. Accounting is a necessary part of being in business and proper reports can shed light on things that may not be intuitive. Truth be told, you can typically glean the information that accounting reports can provide in simple ways outside of formal accounting systems.
Quickbooks and Other Accounting Software
In general, Accounting software is bloated and overly complex. Few companies have been able to compete and gain traction against the Monopoly called Intuit, which controls the accounting software space for small business. By keeping things complex, Intuit has maintained a user base of Millions who could mostly be set free with a simple spread sheet if word ever got out. ( http://www.ZAP-Accounting-Software.com )
9) Discussion -- The Risks of Not Doing your own Bookkeeping
Many horror stories related to Partnership collapse or Company embezzlement gets tied back to the bookkeeping. If you don't know how to do your own books, you don't know how to review the work of others, and if you can't review the work of others, you are a prime candidate for a clock-cleaning. It is just that simple. If you believe the world is a safe place and individuals don't take advantage of other people's ignorance, outsource your bookkeeping long enough to enough people, and eventually that perspective might change.
10) Discussion -- Quickbooks - The Nightmare that just never ends...
Quickbooks
The "need" for Quickbooks -- Mind Control second to none in the Accounting Realm..
Some folks believe the delimiter between being in business and not being in business is Quickbooks, when in fact accounting only represents about 5-10% of all things business. Furthermore, many people new to Business and experienced in Business have been mind controlled into believing that there is no other proper way to do accounting outside of Quickbooks and that is simply a false belief. Not only are there proper ways to work outside of Quickbooks, those ways are often times much faster, more flexible and more effective for problem solving.
Living with Quickbooks is like living in a desert without any clothes and absent of sun screen. The angles in which you can and will be burned will likely know no ends.
Most not in the know, which are a huge majority of business folks,start out by 1) buying themselves a copy of Quickbooks 2) subscribing online to the web based version OR 3) they find a bookkeeper or an accountant to "set them up properly" and with all of those options you are typically lost before you got out of the gate.
- Do you know how crippling Quickbooks can be ?
- Do you know how crippling Quickbooks can be with an overly complex Chart of Accounts ?
- Do you realize any and all "default" Charts of Accounts often times overcomplicate your cost and tax accounting from the get go?
- Do you understand how/why seasoned bookkeepers can lead you totally astray?
- Do you know how the cloud version of Quickbooks differs from the local version?
- Do you know of alternatives to using Quickbooks for your accounting?
The "need" for Quickbooks -- Mind Control second to none in the Accounting Realm..
Some folks believe the delimiter between being in business and not being in business is Quickbooks, when in fact accounting only represents about 5-10% of all things business. Furthermore, many people new to Business and experienced in Business have been mind controlled into believing that there is no other proper way to do accounting outside of Quickbooks and that is simply a false belief. Not only are there proper ways to work outside of Quickbooks, those ways are often times much faster, more flexible and more effective for problem solving.
Living with Quickbooks is like living in a desert without any clothes and absent of sun screen. The angles in which you can and will be burned will likely know no ends.
Most not in the know, which are a huge majority of business folks,start out by 1) buying themselves a copy of Quickbooks 2) subscribing online to the web based version OR 3) they find a bookkeeper or an accountant to "set them up properly" and with all of those options you are typically lost before you got out of the gate.
- The very first step for any accounting system is to define a Chart of Accounts, and most folks define one for Cost Accounting, not Tax Accounting and they make it overly complex, and from there it is all a down hill slide...
11) Discussion -- The Bookkeeping Secrets that you have been missing...
Here's the real deal...
The Google Sheets Solution
In 2016 a spread sheet system for Google Sheets that is more powerful and more flexible than any cloud software accounting solution for small businesses was developed. It can enable one to do both Tax Accounting and Cost Accounting side by side (if that is desired) and it has a system for creating custom reports that is as good as anything you might find in typical accounting software. The ability to bulk categorize transactions by dragging cells makes it by far the fastest accounting solution going, especially if you are doing your accounting retroactively and not using Quickbooks as a Point of Sale System and/or a check writing and inventory system. ( http://www.ZAP-Accounting-Software.com )
This system could be done in an identical fashion with Microsoft Excel, but the networking functionality of Google Sheets makes it gloriously more like a web based database and that is something Microsoft will never be able to touch.
- Accounting is simplest done after the fact, not in real time.
- Many CPA's actually use spreadsheets to quickly reconcile voluminous amounts of transactions and they will use accounting software for aggregated totals...
- Many CPA's do NOT advise using Quickbooks or anything that connects automatically to your bank accounts, as the time to get that stuff setup and the time spent fixing it when it hiccups is often far greater than the time it takes to simply manage it all in a spread sheet (with a few high powered spread sheet tricks as assistants).
- Once a year adjustments never seem to make it back into Quickbooks correctly and that turns that bloated accounting system into just a transaction ledger without any intended benefits.
The Google Sheets Solution
In 2016 a spread sheet system for Google Sheets that is more powerful and more flexible than any cloud software accounting solution for small businesses was developed. It can enable one to do both Tax Accounting and Cost Accounting side by side (if that is desired) and it has a system for creating custom reports that is as good as anything you might find in typical accounting software. The ability to bulk categorize transactions by dragging cells makes it by far the fastest accounting solution going, especially if you are doing your accounting retroactively and not using Quickbooks as a Point of Sale System and/or a check writing and inventory system. ( http://www.ZAP-Accounting-Software.com )
This system could be done in an identical fashion with Microsoft Excel, but the networking functionality of Google Sheets makes it gloriously more like a web based database and that is something Microsoft will never be able to touch.
12) Discussion -- You need to...
So in general,
- You need to learn how to do your books fast and well to stay connected to the money flow
- You need to learn how to do your books with a level of reporting that meets the needs of the Government and yourself. Nothing more and nothing less.
- You need to learn how to use spreadsheets to do your books
- You will need to use a little strategy when it comes to setting up your Checking Accounts, Credit Cards and Credit Accounts to simplify your Bookkeeping and Accounting to the greatest degree.
- You need to have enough cash reserves and enough credit to be able to do your accounting at the end of each month, after the fact, without needing intermediate data for cash management.
- Check out http://www.ZAP-Accounting-Software.com for more details.
99) The Real World Setup for Operations
See Section 99 of the Finance section for relevant real world setup for operations.
A Software Solution
A Routine
A CPA
A Software Solution
- You need to select a software solution for your accounting. A 220 Club related solution can be found at http://zap-accounting-software.com
A Routine
- You need to specify a booking routine that is monthly, quarterly or annually and you need to specdify a different routine for cash flow monitoring
A CPA
- You need to identify a CPA you will use for Tax Preparation and Filing