Accounting for Business Owners

Accounting is information on how your business is doing – it is how you keep score

You need it to give multiple parties the information you want – banks, suppliers, tax authority, spouses and investors

Question you need to ask yourself

·???????What is my true cash balance – it can be your bank account or it may not. Why – checks uncashed, autopayments scheduled,

·???????Do you extend credit? Do you check your client’s credit?

·???????Profits are not equal to your cash – this can be good and bad.?You can have no profits and cash and profits but no cash.

·???????Pay your bills when do not when received, why – establish your credit

·???????Do you accounting or bookkeeping often – multiple times a week at least

·???????DO not do your own payroll unless you have no employees – the knowledge to deal with all the tax requirements will bury you.

·???????Do not intertwine you business and personal funds – this is a major error and can cost you dearly.

·???????Know you market place for costs and pricing for your product or services

What is GAAP – Generally Accepted Accounting Principles

If you are a US based company if you adhere to GAAP it means you data is Relevant, Reliable, Comparable and Consistent!

There are rules you must follow that include:

·???????Full Disclosure

·???????Revenue Recognition

·???????Going Concern principle

·???????Matching Principal

·???????You have a singular Entity designation and Use a consist currency

·???????Materiality

·???????Cost Principles

·???????Time Intervals

·???????Conservatism

·???????These should not change without significant business change

Does your business support the numbers required to pay your vendors, investors, taxes and you?

What type business entity suits you best? LLC, C- Corp, S Corp, Partnership, Non-Profit?

Bookkeepers vs Accountants vs CPA?

Transactional Accounting – what hits the Balance Sheet vs Income Statement Vs Cash Flow

Revenue – Costs – Expenses – Cash

What transactions do most companies have:

·???????Making Sales

·???????Collecting Money

·???????Paying Bills

·???????Paying Employees

·???????Paying Taxes

·???????Purchasing Supplies

·???????Receiving Inventory

·???????Buying Equipment

What type accounting do you use:

Cash or Accrual Accounting

CASH means as you spend or receive cash you make accounting entries

ACCRUAL means you record your transaction when they occur regardless of when cash moves; it is recording the expense in the period it occurs and then you record the cash when it moves in or out.

Assets, Liabilities and Equity (Net Worth)?Assets minus Liabilities equals Equity

Assets are the things your company own be they physical like a computer or non-physical like a patent.

Assets appear on your Balance sheet and represent what you own in the order of their Liquidity with Cash first and Fixed Assets last. Assets are the Resources your company uses to produce revenue, and revenue is required to keep your company alive.?

Breaking Down the Asset Categories:

Current Assets – everything expected to be converted to cash in a year – Cash, AR, Inventory, ST Investments

Fixed Assets – relatively long lives and referred to as Property, Plant and Equipment – trucks, buildings, machinery, desks, computers

Intangible Assets – usually long-term assets with no physical form – patents, trademarks, logos

For most smaller businesses without strong banking relationships current assets are what pays the bills and keep the business going. Long-term assets can help in products and other areas through the creation of current assets like – inventory or accounts receivable.

Current Liabilities are the bills coming due within a year or your business’s cycle. Remember every dime your business owes is a liability and must be paid at some point in the future. Most current liabilities arise during the normal course of business- buying inventory or raw materials, payroll, payroll taxes. These are all items you must pay “soon” versus long-term liabilities like bank loans or mortgage on your building or fixed assets.?

Long—term liabilities are usually “secured” either by the item purchased or by assets you held without debt that then secure the debt or via an owner’s personal guarantee. They can even be to the owner who financed their business with loans form personal funds, Retirement benefits are usually classified as long-terms as well.

Equity is what is left after you subtract Liabilities from your Assets, generally they are appositive number. However, if you are a heavily cyclical business or you are experience unprofitable years the equity can be negative. If your equity is negative the likelihood of survive is general low.

Equity takes many forms depending on the business structure, but most small firms usually have equity consisting of the owner investment and Friends and Family shares. ?

Revenue, Costs and Expenses are in your Income Statement

Revenue is what you make when you sell your product or services meaning the value your business brings to the marketplace. If you are a Lawyer it is the fees you receive for writing a contract or defending in court, a shoemaker sells shoes and associated products for their revenue. It is the items you receive compensation for providing others. I separate this form a business that may have assets like a machine or excess building who sells those items, while you are compensated for the sale it is usually classified as “Other Income” not a revenue item.

Costs are the direct dollars you spend on labor, materials and the associated overhead to manufacture, build or make an item for sale. If you are Lawyer or Consultant, it is the cost of your time and the items required for you to preform those duties – your time. The way the Income Statement works is those items that directly relate to creating your revenue is classified as Costs of Goods Sold or Cost of Labor. You deduct either of the Cost totals from your Revenue to get your Gross Profit. Gross Profit is your excess funds after your basic cost of an item or Service before you include your expenses in the Income statement. It allows you to calculate how much money you have for other items like advertising, rent, office supplies and the other expenses required to run a business.

How are Expenses different form Costs? They seem like the same things but are slightly different – one represents the direct cost for items you sell or services you offer equaling your “costs”. Expenses are the dollars require dot run an office and pay people not involved directly in your service or sales item, such as a customer service person. You must pay them a salary or hourly wage, and this is an expense of doing business. If you are not working out of your home, you will pay rent or storage charges for your place of business.?Expenses are items not required to build your product or provide your service.

Expenses are totaled and that total is deducted from your Gross Profit representing your net income before taxes. Depending on the business and its complexity you can have several other items in your Income Statement, but for most small and mid-size manufacturers this represent your Income Statement.

If you are using a Cash Accounting system every transaction will have a component on each the balance sheet and income statement. If you use Accrual accounting most transactions will have components on the Income Statement and Balance Sheet except the receipt of Accounts Receivable and the payment of Accounts Payable. Cash Accounting has a cash flow statements but it is not as meaningful as accrual accounting cash flow. ??

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