December 2024

Bookkeeping

Payroll Expenses: The Small Business Owner’s Guide to the Galaxy

Dec 31, 2024 ericbuchholzComment

What is payroll expense? Payroll expenses are the costs associated with hiring employees and independent

Bookkeeping

Overhead Costs: What are They & How do They Impact My Business?

Dec 30, 2024 ericbuchholzComment

Spending money is a necessary part of building a business. Business owners can attribute many

When you get busy, you can quickly lose track of your expenses. How can you track your expenses and create a system to manage expenses that doesn’t eat up too much time? The first step is to understand how the accounting process works. Understanding the accounting cycle The cycle includes gathering information from source documents, and deciding on the financial impact of a transaction. Next, you record the transaction using a journal entry, and the information is posted to general ledger. Once all the transactions are posted, you generate a trial balance and use the data to produce financial statements. The accounting cycle starts when something happens in your business. Meet Sally, who needs to record expenses Sally owns Premier Landscaping, a business that provides landscaping and tree removal services. On August 1st, Premier spends $2,000 on mulch. The vendor gives Premier an invoice, and Sally pays cash for the purchase. The invoice is considered a source document, which Sally can use to post an accounting transaction. Businesses track expenses by account number. Chart of accounts The chart of accounts lists every account number and the account’s description. Balance sheet accounts, such as cash and accounts receivable, are listed first, followed by income statement accounts. Expenses are income statement accounts, and are typically listed toward the bottom of the chart of accounts. Create expense accounts for each of your spending categories, so that your expense reports provide more detail. To make decisions about Premier’s spending habits, Sally creates separate accounts for mulch, sod, flowers, seed and other expenses. To make expense tracking easier, she uses QuickBooks® reports to analyze her monthly expenses. Premier’s mulch expense is account #7000. Sally uses the entire $2,000 of mulch immediately, and posts a journal entry to record the expense. Post a journal entry A journal is a record of each transaction that occurs, listed in chronological order, and accountants post activity using a journal entry. Think of journal entries as an expense tracker for your small business. Here is the August 1st mulch expense journal entry: The journal entry is dated August 1st. Expense accounts are increased with a debit entry, and cash is reduced by a credit entry. To make the analysis process easier, each journal entry includes an explanation of the transaction. All of the journal entries are posted to general ledger. Reviewing general ledger A company’s general ledger is a record of every transaction posted to the accounting records throughout its lifetime. Sally frequently reviews general ledger to verify that she’s posted transactions correctly. The trial balance summarizes general ledger detail. Scanning the trial balance Premier’s trial balance is a listing of each account used to post transactions and the current account balance. This document provides a quick snapshot of Premier’s current financial condition. Sally can scan the list of accounts and balances to decide if the accounting data looks reasonable. If she wants more detail, general ledger is the place to go. Once Sally has an adjusted trial balance, she’s ready to generate the financial statements. Producing financial statements The trial balance is used to generate the financial statements, including the balance sheet, income statement and statement of cash flows. Sally produces financial statements at the end of each month, and the accounting cycle starts over on the first day of the next month. The accounting cycle is one tool to accurately track expenses, but you need to know more. The best budgeting systems also follow accounting industry standards. Accounting rules of the road Not every purchase is immediately expensed. To account for expenses correctly, your business needs a capitalization policy. If a purchase will be used over a period of months or years, the cost is posted to an asset account. Purchases that are used right away are recorded as expenses. What, exactly, is an asset? Assets are defined as resources that are used to generate revenue. The mulch, for example, was purchased to complete a landscaping project that generates revenue for Premier. As a result, the mulch purchase is immediately posted as an expense. Other assets are used to produce revenue over time. Here is Premier’s journal entry for the purchase of $10,000 in flowers on February 1st: Premier will keep the flowers in a warehouse and use them over the next three months on a number of customer jobs. Instead of expensing the flowers immediately, Sally records the purchase using an asset account (#4100 flowers). On March 15th, Premier plants $1,500 worth of flowers for the Smith landscaping project and posts this journal entry: This journal entry moves $1,500 out of the flowers asset account and into a flower expense category. This process applies the accrual method of accounting to Premier’s accounting records. The accrual method posts revenue when earned, and expenses when they are incurred, to produce revenue. The $1,500 in flowers purchased on February 1st are not expensed until they are used for the Smith project. On March 15th, the flower expense is matched with revenue from the Smith job. The result? Sally knows the true profit of loss on each customer project. Premier bills $6,000 for the Smith project and posts flower, mulch and labor expenses totaling $4,800. Sally’s profit on the job is $1,200. The accrual method ignores cash flow when computing profit and loss. Premier paid cash for the flowers on February 1st, but the journal entry does not impact expenses. Every small business should use the accrual method of accounting. When you use the accrual method, your financial statements are comparable with other firms in your industry. Investors, creditors and regulators need financial statements that comply with accrual accounting. Managing your accounting transactions is time consuming, but you can work more efficiently when you automate. Save time with automation Think about the August 1st purchase of mulch, and all the accounting-related tasks that must be completed: File the vendor’s invoice as a source document. Post the journal entry and review the general ledger to verify that the entry is correct. Generate a trial balance and post entries to adjust the trial balance. Use the adjusted trial balance to produce the financial statements. Reconcile each of the bank accounts, and confirm that the vendor was paid through the correct checking account. Here are other tasks that create more accounting work for your small business: Credit card transactions: If you pay business expenses by credit card, you must review the credit card statements. Each expense must be posted to the correct account, and you must make credit card payments on time to avoid interest and penalties. Any late payments will impact your business credit score. Debit card activity: Payments using a debit card must be posted to the correct expense accounts, and debit transactions impact your checkbook. Personal capital: Sally contributed $50,000 of cash and equipment into Premier when she started the company. To record this capital contribution, Premier not only increased the cash and equipment asset accounts, but also increased equity. Sally must carefully track her personal capital balance, so she can report her ownership interest on her personal tax return. Technology can help you save time and reduce complexity in your business. Streamline your accounting An excel spreadsheet is a terrible way to manage any part of your accounting process. Spreadsheets require manual entry, and your risk of error is high. Owners who use spreadsheets may use an outdated version of the file, or lose the document. If spreadsheet links contain errors, your data will be incorrect. Use QuickBooks to save time and increase the accuracy of your accounting records. If you need a real-time spending tracker, select from the expense reports available in the software. You can scan receipts and other source documents, and attach them to specific journal entries. Use software to download your bank statements and credit card activity directly into your accounting records. You’ll save time and reconcile your bank account faster. Technology also helps you scale your business efficiently. If you grow sales, you’ll need to post more accounting transactions. With accounting software, you can process more transactions in less time. Make the switch to accounting software, so you’re ready to take on more business. The owner’s personal budget and financial goals are closely tied to the success of the business. Assessing your personal finances Every business owner needs personal money management skills. You may use budgeting apps to monitor your personal spending. Many consumers link a checking account and a savings account to a mobile app. Each month, you can save money by transferring a fixed amount from checking into savings. Once your savings balance is large enough, it becomes your personal emergency fund. Intuit® offers personal finance apps for Android and other mobile devices. Tracking expenses is much easier when you move away from excel spreadsheets and use technology. You need a plan for your personal and business finances. To track business expenses accurately, create an annual budget. Use a budget to increase profits Before the start of each year, Sally creates a formal budget and makes a number of assumptions: Sales: She estimates the total dollar amount of sales that Premium will generate. Materials and labor costs: Using the sales estimate, Sally forecasts the amount of material (mulch, sod and flowers) and the hours of labor she will need for the year. Standard costs: Standard costs are the price per unit your business pays for material and labor. Sally estimates the cost she’ll pay for each pound of sod, and the hourly rate she’ll incur for labor costs. A variance is defined as a difference between budget and actual costs, and Sally performs variance analysis each month. There are two reasons for an expense variance: Price variance: Premier pays more or less than budgeted. A tight labor market may require Sally to pay $27 per hour for labor, rather than the budgeted $25. The higher actual price is defined as an unfavorable variance because total expenses are higher. Quantity variance: Premier uses more or less than budgeted. If Sally is able to hire experienced landscaping workers, they may complete work in less time than budgeted. Fewer labor hours reduces costs and produces a favorable variance. Spending is less than budgeted. If Premier to pays $27 for labor, but experienced workers complete a particular job in less time, Sally has two difference variances. She paid more per hour than planned, but used fewer hours than budgeted. In this case, Sally should look at the total dollars spent for labor costs, which takes into account price and quantity variances. If Premier spends $3,500 on labor for the Johnson project rather than the $4,000 budget, the total variance is favorable (less spending). Sally can use variance analysis to make changes and increase profits. She can negotiate lower costs for materials, or train her staff to work more efficiently. If she makes changes each month, she’ll generate higher profits for the year. How can you use all of this information? What to do next Managing expenses well can make or break your business. Here’s what to do next: Understand the accounting cycle and the accrual method of accounting. Assess your current system for managing expenses. Use QuickBooks and other tools to automate the expense management process. Perform variance analysis and make changes to increase profits. Use these steps to manage expenses in less time and lower your total costs.

Bookkeeping

How Do I Track My Expenses?… Without Taking Up All My Time Doing It!

Dec 29, 2024 ericbuchholzComment

When you get busy, you can quickly lose track of your expenses. How can you track

Accounting

What is Payroll Accounting?… The Ultimate Guide for Small Business Owners

Dec 28, 2024 ericbuchholzComment

The purpose of payroll accounting is to keep track of employee compensation and related payroll

Bookkeeping

How to Measure Profitability: 3 Surefire Strategies

Dec 27, 2024 ericbuchholzComment

Many business owners understand profitability from a fundamental standpoint—if your income statement shows more revenue than expenses,

Bookkeeping

How to Accept Credit Card Payments… A Beginners Guide

Dec 26, 2024 ericbuchholzComment

While cash is king when running or starting a business, credit cards are queen when

Business

12 Types of Small Business Insurance: Which Policies Are Best For You?

Dec 24, 2024 ericbuchholzComment

What is small business insurance? Small business insurance is a type of coverage that protects

A profit and loss (P&L) statement is the same as an income statement. It’s a financial document that includes a company’s revenues and expenses. Business owners use the P&L to understand how much money a company makes, which they can also quickly and easily do with accounting software. Knowing how to read a profit and loss statement is key to making informed business decisions. It shows you where you might be able to cut costs. Let’s look at exactly what a P&L is, why it’s important, and how business owners should use it: What is the format of a profit & loss (P&L) statement? How to put together a profit and loss statement How to read a P&L statement Example of a profit and loss statement Spend more time growing your business Profit and loss statement FAQ QuickBooks Online tutorial for understanding a profit & loss statement. What is the format of a profit & loss (P&L) statement? A profit and loss statement is a snapshot of a company's sales and expenses over some time, such as one year. It shows company revenues, expenses, and net income over that period. The bottom line on a P&L will be net income, also known as profit or loss. The profit and loss formula is: Revenue - Expenses = Profit or loss There are many ways to format a P&L statement, but all versions include the same basic information. Sales are at the top of the P&L statement, while expenses appear below. The profit or loss is the difference between the two. Here are the main components of a profit and loss statement: Example of a profit and loss (P&L) statement. Revenue Revenue is the money your business makes from selling goods or services. It’s the very first line on the profit and loss statement. Note there are two types of revenue: Gross revenue, or total revenue or sales, is the total amount you make before accounting for discounts, returns, or expenses. Net revenue, also known as net sales, is the money you make after deducting discounts and returns. Note that net revenue is gross revenue minus discounts and returns. Expenses The expenses of a business include all the costs to generate revenue. Cost of goods sold (COGS) is the cost of materials and labor a company uses to make a product or service. It’s also known as the cost of sales. The costs can include raw materials or direct wages for employees. But also certain overhead costs, such as utilities. COGS are expenses that show up on the top part of the P&L before gross profit. Gross profit is the money you make from sales after subtracting your cost of goods sold, using the formula: Gross profit = Net revenue - Cost of goods sold Other expenses can be operating or non-operating. Operating expenses are the costs of running your business. While COGS are for making a product, operating expenses are the costs to support that process. Operating expenses include: Rent Marketing costs Salaries for admin staff Depreciation Licensing fees Non-operating expenses are costs not part of your core operations. These include taxes, fines, legal fees, and interest. Non-operating expenses include anything unlikely to happen again. For example, losses due to shutting down a business operation. Income Income is how much money you make in your business. There are two key types of income—operating and net income. Operating income is a business's income from its core operations. It excludes non-operating expenses, such as taxes or interest expenses. This type of income measures how well a company generates money from its main business. The formula for operating income is: Operating income = Gross profit - Operating expenses Net income is your bottom line—the last item on your P&L. It's the money left after subtracting all expenses. Net income = revenue - COGS - Operating expenses - Non-operating expenses Net income comes after both operating and non-operating expenses on the P&L. It’s a measure of the money left over for shareholders or owners. How to put together a profit and loss statement The P&L will include three key components—revenue, expenses, and income. There are three key steps to making a profit and loss statement. 1. Start with revenue Determine what period you want to create a profit and loss statement for. This can be any period, but it’s generally best practice to put together a P&L monthly to help identify trends. You’ll want to calculate your gross revenue ‌for that period and list it on the top line of your P&L. 2. Calculate your costs After accounting for all your revenues, group your expenses into one of three categories: Cost of goods sold (COGS) Operating expenses Non-operating expenses COGS are all the costs of making a product. For a service business that doesn’t make a physical product, COGS can include labor for employees performing the service. For example, a hair stylist’s COGS would include the time spent styling hair. You'll group all the other costs of running your business as operating expenses. Non-operating expenses should be everything that's left. This will be the money you spend on things like taxes and interest. For example, a hairstylist would have operating expenses like cosmetic supplies, insurance, and marketing. Non-operating expenses may include interest on business debt or writing off unsellable inventory. 3. Figure out your net income This is the last step. It's subtracting all the expenses from your revenue. The net income will either be a profit or a loss—or, in very rare cases, zero. How to read a P&L statement Once you’ve put together your profit and loss statement, it’s useful to analyze it. It’ll show whether you’re profitable or not. But it also allows you to identify areas to save or reduce spending. Determine profitability Profitability measures how much a business earns compared to its expenses. There are different ways to measure profitability. Two common measures of profitability are gross profit margin and net profit margin. Key profitability ratios, including gross profit margin and net profit margin. Say a window maker’s revenue was $500,000 last year. They spent $300,000 on COGS to make the windows. Net income for the year was $40,000. The company's gross profit margin is 40% or ($500,000 - $300,000) / $500,000. Its net profit margin is 8% or $40,000 / $500,000. Many small businesses aim for a net profit margin of 10%, although this will depend on your industry. Assess financial ratios Beyond profitability, the P&L can also help you calculate other ratios. But you’ll need the help of the balance sheet. Other key ratios you’ll want to look at are efficiency ratios. These assess how well a company uses its resources. They use one item from the P&L and one from the balance sheet. The accounts receivable turnover ratio shows how well a business is managing accounts receivable. Accounts receivable is the amount of money that your customers owe you. You’ve already sent them the products but haven’t collected payment yet. Here’s the formula: Accounts receivable turnover = Sales / Average accounts receivable A low or declining accounts receivable turnover shows a declining ability to collect customer payments. The inventory turnover ratio tells how well a company is managing inventory, and the formula is: Inventory turnover ratio = Cost of goods sold / Average inventory You can also use an inventory turnover calculator to help you see how your business is doing. Comparing P&L statements P&L statements are most useful when comparing them to previous periods because they allow you to track progress over time. They’re also useful when it comes to setting goals for your business. note iconYou can also compare your P&L to companies in your industry. This will help you determine where you stand relative to other businesses. Example of a profit and loss statement The single-step method of putting together a P&L statement is simple, straightforward, and involves only one calculation. This method subtracts all expenses from revenues to get net income—it doesn't separate revenues and expenses into different categories. The disadvantage of the single-step method is that it doesn't provide as much detail. This makes it difficult for businesses to analyze their profitability. However, the single-step method is quick and easy to calculate. It works for businesses that don’t have many expenses. The multistep method involves more calculations and the classification of expenses. But it makes assessing your company's profitability easier. It groups the cost to make products or services as costs of goods sold (COGS). The remaining expenses are either operating or non-operating. Here’s a simple profit and loss statement using the multistep method, which is what many businesses use: Spend more time growing your business As a small business owner, you need to be aware of your company’s financial health. One of the best ways to do this is to analyze your profit and loss statement and assess key financial KPIs. Regularly reviewing your P&L will give you a better idea of how your business is doing. Accounting software like QuickBooks Online makes creating your P&L and other financial statements easy, as well as assessing your spending.

Bookkeeping

What Is a Profit and Loss (P&L) statement… And Why Is it So Important to My Business?

Dec 22, 2024 ericbuchholzComment

A profit and loss (P&L) statement is the same as an income statement. It’s a financial

Bookkeeping

What Does a Bookkeeper Really Do?

Dec 22, 2024 ericbuchholzComment

What is a bookkeeper? A bookkeeper is a professional who helps businesses and other organizations

Many business owners begin on a small scale in response to these unexpected questions: “Have you thought about selling those?” or “Can you do that for me?” They realize they might be able to make extra cash on the side—or even turn their hobby into a career. When a business venture starts this way, the owner usually doesn’t know if it will gain traction or expand. As a result, many business operations start with business finances that are simply an extension of personal finances, using personal accounts. As the business grows, the owner may not make any adjustments, thinking, “It’s all my money anyway, so why does it matter?” 4 reasons to separate business and personal finances How to separate business and personal finances: 6 simple steps Separate business and personal expenses for accuracy and protection Operating a business through personal financial accounts presents significant problems on many fronts. The foundation of financial health for every business owner is separating the finances of the business from the owner’s personal finances. This is true for businesses of all sizes, even the smallest ones with only one owner and no employees. 4 reasons to separate business and personal finances To see how your business is performing. The only way to know whether your business is profitable—and how much cash it's generating—is to have an accurate picture of business revenues and expenses. These enable financial reporting to get the full picture of your business' financial standing. If you commingle business and personal income and expenses, you’ll never know your true profitability. To file taxes accurately. Calculating business taxes, regardless of the type of filing, requires accurate financial records of business revenues and expenses. If you’re audited, you need to show that transactions used to calculate business taxes were for business purposes. Bookkeepers, including QuickBooks Live Expert Assisted experts,* can help you get your books clean for tax time. To protect your personal assets. Some business legal entity types offer the owner a way to separate the legal and financial liabilities of the business in a way that offers protection for their personal assets. But if the owner commingles finances between their personal accounts and the business entity, it could jeopardize these protections. Check with your accountant for help determining what kind of business entity you should pursue. To get more access to business financing. If a business has more than one owner or needs to take out a business loan, it's essential to have accurate business accounting and financial documentation. Most lenders require business financial statements for larger loans. External business partners need to see standardized financial reports to understand the financial health of the business. A person sitting at a desk with a laptop computer. Run your business with confidence Get help and guidance when you need it from real QuickBooks experts.* Start here How to separate business and personal finances: 6 simple steps It’s straightforward and inexpensive to separate business finances. Separation is the key to establishing good financial hygiene. Here's how to separate business and personal expenses and finances. File paperwork to establish a business. Creating a business that exists separate from yourself can protect your personal money and assets. Choose a business structure—LLCs, partnerships, and S-corps are the most common for small businesses—and file the paperwork with your state. You also need to get an Employer Identification Number (EIN) from the IRS for filing taxes. Once your business exists as an entity separate from yourself, be sure to follow the below best practices to avoid "piercing the corporate veil." Separate personal and business bank accounts. The business should have its own checking account and debit card for making business purchases. You need to have your EIN to set up a business bank account. It's often convenient to keep business accounts at the same bank as your personal checking. This makes transfers and distributions easy, and can sometimes mean extra benefits or rewards. This also allows the bank to see your personal finances in borrowing situations that require a personal guarantee from the owner. Create separate profiles to receive payments. Social payment platforms such as Venmo, Paypal, and Zelle are popular ways to pay friends and family, but business payments should run through a separate account. Often, digital service platforms have business-specific profiles that keep you compliant with their terms of service too. Set up business-specific profiles to accept digital payments or for merchant services, if you accept credit card payments directly. Accounting software like QuickBooks Online can link all your digital services platforms together to track revenue in one place. Run all business financial transactions through the business accounts. Now that your business banking account and avenues to receive payment are established, keep those financial transactions separate from your personal income streams and spending. All business expenses should be paid or reimbursed out of business accounts. All revenue from clients should flow directly into business accounts. Work with your accountant to determine the best way to pay yourself through your business. With growth, establish other accounts under your business. As the business grows, it might need other services, such as credit cards, loans, payroll, insurance, and money market accounts. Apply for or run these services using your business name and EIN to avoid piercing the corporate veil. Keep track of all business revenues and expenses. Good tracking and bookkeeping practices are essential for many reasons, including accurate business financial statements and tax calculations. Experts can give you support and answer questions through QuickBooks Live Expert Assisted, so you can feel confident in your books.* There are also low-cost courses you can take to build your bookkeeping skills. See how this voiceover artist uses QuickBooks Live Expert Assisted. Explore tools made for businesses like yours. Get 50% off QuickBooks for 3 months. Start here Separating business and personal finances for accuracy and protection If your business already has separate financial accounts, you’re on the right track. Make sure you use the accounts as intended and run business transactions through business accounts. If you’re still using personal accounts for some or all business-related transactions, talk with a banker who can help you establish the right set of business accounts for your situation. Separating your business expenses and personal expenses is an important step in protecting your personal finances.

Bookkeeping

6 Easy Steps to Separate Business and Personal Finances

Dec 21, 2024 ericbuchholzComment

Many business owners begin on a small scale in response to these unexpected questions: “Have

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December 2024

Payroll Expenses: The Small Business Owner’s Guide to the Galaxy

Overhead Costs: What are They & How do They Impact My Business?

How Do I Track My Expenses?… Without Taking Up All My Time Doing It!

What is Payroll Accounting?… The Ultimate Guide for Small Business Owners

How to Measure Profitability: 3 Surefire Strategies

How to Accept Credit Card Payments… A Beginners Guide

12 Types of Small Business Insurance: Which Policies Are Best For You?

What Is a Profit and Loss (P&L) statement… And Why Is it So Important to My Business?

What Does a Bookkeeper Really Do?

6 Easy Steps to Separate Business and Personal Finances

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