Managing your accounts receivable is very important because the timing of receivables plays a major role in your company’s cash flow. In addition, you want to ensure your customer balances are accurate, and your receivables current, based on the terms of service you offered your customers. Reconciling the individual customer account balances with the general ledger balance establishes the accuracy of the balance sheet asset. Reconciliation of your receivables should be done on a monthly basis – at least, as part of the month-end closing process.
What is Accounts Receivable?
Accounts receivable is the monies your customers owe you which is derived from the goods or services you have sold them or provided for them – respectively, on credit. When you sell goods or services to your customers on credit, the amounts they owe your business make up the accounts receivable balance in an accounting record called the general ledger. Their individual balances are found in the subsidiary sales ledger and listed in the aged accounts receivable report. This aged accounts receivable report will keep you apprised of the monies that are due, so you can reach out to those customers before they become way overdue. Reconciling accounts receivable means you are ensuring that the total of the individual amounts due from debtors equals the balance of the accounts receivable account in the general ledger.
How is Accounts Receivable Reconciliation Done?
You need to verify the general ledger accounts receivable balance, starting with the balance brought forward from the previous period. To do this: 1) Add the total of all invoices issued from the sales day book and deduct any credit memos issued. 2) Deduct the total payments received from customers – taking the figure from the cash book, and add any finance charges made. (If you post open credits (overpayments or advance payments from customers) to a separate general ledger account, the total at this point should be the same as the accounts receivable balance.) 3) Deduct open credits and add open credit refunds. 4) Check the final figure against the total of individual customer balances from the aged accounts receivable report. Any difference between the two balances must be investigated.
Common Reasons for Discrepancies in Accounts Receivable Reconciliation
The most common reason for discrepancies in accounts receivable reconciliation are journal or adjusting entries made directly in the general ledger and not reflected in the subsidiary sales ledger, or vice versa, and differing cutoff dates of the reports used. Two other possible reasons for discrepancies in the reconciliation numbers are; incorrectly offsetting customer and supplier contra-accounts, and posting to the wrong general ledger account.
When you have identified all the errors, you need to make the adjusting entries needed for the accounts to reconcile with the correct balances, and include a clear description of the reason for each transaction for auditing purposes. Where possible, reverse the incorrect entry and re-post it correctly, rather than posting the difference only, to make the transaction easier to follow. When all entries have been made, reconcile the balances again as a final check.
Incorrect accounts receivable balances will not only throw off your business financials as far as the receivables showing more monies owing than are actually owing, or vice versa, but can also make you lose valuable customers if you repeatedly send them statements with inaccurate balances. One time? May be not so much, but more than once could shout incompetent or dishonest.
Reconciling all your accounts on a monthly basis is the single most important thing you could do for yourself and your business. There are numerous software available to help make this process effortless, but regardless of the software or lack thereof, monthly reconciliations must be done in order to avoid costly mistakes.
Why reconciling your accounts is so important
Reconciliation is so important because it is the only way to be certain your account balances are in agreement with your financial institutions, vendors, etc. Reconciling your accounts ensures that the actual monies spent matches the monies leaving an account at the end of a period, and that the actual monies put in also matches the monies coming into an account at the end of a period. When you reconcile your bank statement every month with your QuickBooks balance for example, you will become aware of checks that have not been cleared, and this will help you track down any potential missing payments. You will also become aware of any deposits you have made that are not showing up. This is rare, but it does happen! In addition, you can use your reconciliation statement to make sure your other company transactions are going through and have been calculated for the proper amounts.
There are aspects of your financials that reconciliation will not take care of such as personal monies you used up for the business, but have not recorded, as well as other assets and liabilities that may not have affected your reconciliations. So, reconciliations alone will not make your “books” accurate. You may need the help of a bookkeeper and CPA to get these aspects worked out; bookkeeper to ensure everything is recorded, and the CPA to analyze what is recorded and make the final call on whether the entries make the final books better or worse for the business.
It is imperative that controls – checks and balances, are in place to monitor the business banking and credit card transactions. For large firms you should have multiple hands assigned to cross-checking banking activities on a regular basis. For small businesses, you the owner should check your banking transactions – at least on a monthly basis to ensure everything is on par – even though you may have someone assigned to reconcile your accounts. When bank statements are not monitored and reconciled, the potential for undetected loss is high. Not all employees or accounting firms are honest, and you may not miss money that has been taken for some time. This is the reason some employees are able to embezzle hundreds if not thousands of dollars over time. Reconciling your bank statement helps you prevent losses and may indicate a potential problem in your accounting system.
What accounts can be reconciled and how to reconcile them
Any account that you get a statement for, showing a beginning and ending balance, can and should be reconciled. This includes: bank accounts, credit card accounts, loans and lines of credit accounts, and vendor accounts. There is also the internal reconciliation of many accounts, including customer receivables accounts.
Reconciling any account in software such as QuickBooks is a moderately easy feat. The time it takes to reconcile your accounts will depend on the accuracy of the transactions entered in your accounting system; if they were entered correctly – precise numbers and debit/credit accounted, your reconciliation should be done in a shorter time. If however they were not carefully entered, it may take you a longer period of time trying to locate the discrepancies. If this is the case, you may need to go transaction by transaction verifying your bank statement numbers with QuickBooks and marking each cleared as you go along. This can be tedious if there are many transactions; however, it must be done. You can see why it is vital to enter all transactions accurately to begin with. If you are using QuickBooks or other similar software, you should take advantage of the “download” feature. Initially, you will need to edit and select the right accounts as well as input the vendor or customer before you add or match each transaction; however, QuickBooks will begin to recognize each transactions that you have edited after a while and most importantly your numbers will be accurate with the correct corresponding debit or credit.
Using the ask my accountant account for questionable transactions
QuickBooks has a “Ask My Accountant” option in their chart of accounts that can be a huge ally in helping you reconcile. At times you may have transactions that you are not sure how to enter, or how to enter to be beneficial to your business. Any questionable transactions should be coded to “Ask My Accountant” so that you can continue with your reconciliations while having a conspicuous account to house them and have them easily accessed and rectified at a later date by your CPA.
So, reconcile your accounts on a monthly basis! You want to ensure that all the transactions are in your ledger and accurately accounted for. It is easy to forget to enter an expense or a payment when you are in a rush or if you have misplaced a receipt, so cross-checking against the account statement can be a good safety net for your own books. Doing so will ensure that you are getting paid—and paying people back—promptly, which in turn will help you keep other parts of your accounting in order such as your cash flow, profit and loss statement, etc. Of course you can trust your suppliers and creditors to charge appropriately, but everyone makes mistakes and are prone to err.
Many states are in a state of budget deficit and are looking for ways to fill that gap in the shortest time possible. They are searching really hard for new income source, and many of them may be on their way to finding one in the form of owed sales taxes to them – plus fees. They are creating means to get their monies in, such as the Nexus survey, and are on the prowl to collect on every dollar. That said, I have seen many small business owners who are disconnected from their bookkeeping/financial/taxes aspect of their businesses, which has left collected sales tax unnoticed and the filing requirements unmet. Some are also aware of their sales tax responsibility, but have taken it less seriously than other taxes such as payroll taxes. As with any tax requirements, there are fines associated with non-compliance, and you want to avoid those fines at all cost.
What is Nexus?
Nexus is a connection that a business has with a state, and it has to do with a form of presence. In the sales tax world, you owe sales tax to a state if you have nexus in that state and you are selling taxable items. The scary part for small businesses is what makes up nexus. See SBA’s contributor Caron Beesley “Sales Tax 101 for Small Business Owners and Online Retailers” for more sales tax/Nexus information. It is your responsibility to know if you are required to collect and file sales tax, and the correct way to go about it, such as filing for a sales tax permit prior to collecting sales tax.
It is advisable to keep a separate account for sales tax collected, and not include it with your income as it is not income but monies you collect on behalf of the relevant states, to subsequently turn over to them. If you have a bookkeeping and accounting software system setup for your business, this can make it very easy for you to setup an account so that that portion of monies received can be transported to that account, where it will be noticeable on the balance sheet as a payable and therefore owing by you.
Taxable in One State but Not in Another
Sales tax, like many other taxes, can be complicated and there are gray areas that are difficult to sort through. According to Caron, “As a general rule, if your business has a physical presence in a state – nexus, whether it’s a store, warehouse, office, employees or other criteria established by your state, then you must collect sales tax from customers in that state. If you do not have a physical presence in a state, then you are not required to collect sales taxes.”
Minimizing Sales Tax Audit Risk
You may receive a form that looks like a survey and asks innocent-looking questions such as: how many employees do you have? And, what state do they work in? The surveys do not look like they are from a state government but they may very well be. It is their way of getting you to admit nexus. Do not complete any of the surveys; it could expose you to a huge liability. It is always best to get a sales tax professional involved to help you determine the taxability of your items as well as to interpret nexus. Many states are hiring auditors and aggressively pursuing businesses, so due diligence in this area is prudent.
Get a grip on your sales tax and avoid getting blindsided
In an effort to combat holes in their budgets, many states are working to collect on monies owing to them, from all sources, by whatever means necessary. Sales tax is one such source of helping to fill that gap in budget, and so if you have collected sales tax on their behalf and have not paid it over, you need to do so at your earliest convenience to avoid hefty fines and fees. If you have not been collecting sales taxes, but should have been, get your paperwork in order and start doing so as quickly as possible.
If you need help getting a grip on your sales tax, there are many bookkeeping and accounting companies – like ourselves who are equipped with the knowledge and technical know-how to get your sales taxes under control. If you have not already done so, get a system setup where you can effectively track your collected sales tax, and pay attention to your sales tax filing. Reach out for the help you need, and avoid unnecessary penalties.
There are five (5) key questions that must be answered before making a decision to do your own bookkeeping versus hiring a professional:
How big is your business?
What is its growth forecast?
How complex are its finances?
What can your business afford?
Are you competent and knowledgeable enough in this field to handle your own bookkeeping?
If you can answer the abovementioned questions honestly, your decision should be much easier to make. So, weigh the pros and cons of doing your own bookkeeping and make your decision.
If you are using a bookkeeping and accounting software such as QuickBooks, and you have a basic understanding of accounting principles as well as a CPA on board, you can indeed opt to get your own bookkeeping done. Also, bookkeeping can be time-consuming, but if you are equipped with the right accounting tools and knowledge, your bookkeeping time can be greatly reduced. Here are some advantages and disadvantages of doing your own bookkeeping:
Advantages
1) You are face to face with your numbers all the time, and as such you remain “in the know” and are able to make changes quickly – if necessary, to improve your business bottom line. Of course an efficient and knowledgeable bookkeeper will be able to give you reports explaining your business stance; however, it will not be the same as you intermingling with your numbers on a daily basis. You will make better business decisions because you always know where you stand financially. At any given time, you know who owes you money as well as what bills you need to pay. If a supplier or vendor has made an error you can act on it immediately instead of weeks or months when your bookkeeper brings it to your attention.
2) You are able to make informed decisions sooner than later. Doing your own bookkeeping gives you better control over your business dealings.
3) You could save yourself a few bucks.
4) Seeing your numbers up close consistently can be very encouraging if they are what you expected, or even better.
Disadvantages
1) Bookkeeping can be a real distraction to your business’ main purpose. You take time away from important business dealings that could be enhancing and improving your business bottom line. Bookkeeping is very time consuming and it happens to be one of those back-office tasks that can be done by someone else. Taking on the behind-the-scenes task of bookkeeping may not be the best use of your time. You can instead use this time to innovate, focus on making your product or service better, and grow your customer base. A huge part of a business success is maximizing its time.
2) If you do not have bookkeeping and accounting knowledge, you can make a mess of your books which can be costly – either to hire a professional to fix it, or you’ll pay too much in taxes. Bookkeeping and accounting can be learned; however, it is likely that you do not have the time to spend educating yourself on accounting basics o probably don’t want to. You would also need to master an accounting software which could turn into a very time consuming task.
3) Seeing your numbers up close consistently may be discouraging if they are not what you expected them to be.
Should You Do Your Own Bookkeeping?
Ultimately, the decision will be determined by how valuable your time is to you as well as your answers to the abovementioned questions. Be strategic in how you spend your time and money! Focus your time and energy on the areas of your business that you are truly passionate about. If bookkeeping and accounting is not a part of that passion, you can always delegate your bookkeeping. Maximize your time, and realize your business’ full potential!
For any number of reasons, you may opt to do your bookkeeping on your own instead of hiring a bookkeeper in-house or outsourcing your bookkeeping. Like many things, there are advantages and disadvantages to doing your own bookkeeping, but with some basic accounting knowledge and a keen eye for detail you should be able to pull it off. Here are a few tips to help you as you do it on your own:
Use the Right Accounting System
Accounting is either cash-based, or accrual-based. With the cash method, you count the income when you receive it, and expenses when you pay them. Under the accrual method, you count income and expenses when they happen, and not when you actually receive or pay them – respectively. The other main difference between the two methods is the ability to budget accurately. Accrual method of accounting allows for better budgeting and planning because it looks at when liabilities are incurred and revenue earned and not when cash is paid. This method puts on the books liabilities that might otherwise be forgotten, like accrued interest. The cash method does not take accrued interest into account until it is required to be paid. This could put a strain on a small business that did not plan to pay out accrued interest balance, and is now faced with cutting expenses in other areas to have enough cash to pay the outstanding balance. The two methods have their advantages as well as disadvantages, and as far as filing taxes, the IRS only requirement is that you use the accrual-based system if your annual sales is more than $5 million or you store inventory.
Record transactions as soon as they occur
If you are using spreadsheets for your bookkeeping, or doing it manually on paper, you need to record your transactions as soon as they occur. If you are using an accounting software such as QuickBooks, you need to decide whether you will be recording transactions as they happen or adding them via the bank downloads later. Regardless of the method you use, keep your books updated at all times. Doing so will allow for little to no discrepancies, better workflow, and you will also have updated information on which to rely for decision making.
Record all business transactions
In order to have accurate numbers from which to make good business decisions, and file correct tax returns, you need to ensure all numbers affecting the business is accounted for and recorded. For example, if you are a business owner who sometimes uses personal funds for business expenses – and vice versa, you need to include those numbers in your bottom line.
Track Reimbursable Expenses
As a Small Business owner, it is very likely to sometimes use your personal funds to for pay business expenses. These monies should be reimbursed to you as well as recorded in the company’s expenses, and so there should be an account created to keep track of these reimbursables. Also, if your employees are construction workers or engineers who are usually in the fields and may use their funds to make small purchases that are immediately needed in order to continue their work, you need to collect those receipts and add them to the reimbursable account from which you will later repay them. Doing this is also important for accurate job costing.
Keep Accounts Categorization Simple
Overcategorization leads to miscategorization and ultimately inaccurate reporting. As a small business, you should be able to categorize your accounts in three to four sections:
1) Income – under which you can create subaccounts of your various streams of income
2) Cost of Goods Sold or Cost of Sales – under which you can create sub accounts for the employees salaries who are directly involved in the creation of the products you sell or the services you offer, as well as the products purchased to be used in the creation of your complete product for sale.
3) Operating Expenses – under which you can create a subaccount for Administrative Expenses and further subaccounts under Administrative expenses to list those individual accounts.
4) Other Expenses – under which you can create subaccounts to list other expenses that do not fall under any of the above categories.
The balance sheet accounts are usually fairly standard with three main sections: 1) Assets, 2) Liabilities, and 3) Equity each with their own subaccounts. You will need to create additional accounts on as needed basis. For example, if you loan money to your company, you will need to create a liability account to record these amounts the company owes you. Likewise if you borrow money from your company, you will need to create an asset account to reflect this.
Here is an example of a Simple Profit & Loss Report or Income Statement:
Deduct Sales Tax from Total Sales
If you are a retail business that collect sales tax on behalf of the government, you should deduct these sales taxes from your sales. If you are using a software such as QuickBooks for your bookkeeping, and you do not track inventory in QuickBooks, you can setup this account as an Income account and set it as a discount so that it will be listed at the top of your Profit and Loss report and lessen from the total sales. Also, avoid penalties and interests and pay over your sales taxes as soon as they are due.
Keep Proper Records of Loans Received
Many small business owners need financial backing at their startup, and may take out a loan or two. These loans must be recorded and tracked in separate accounts, paying special attention to separating the principal repayment and the interest payment. The interest is an expense to your company and should be recorded in the expense section of your income statement or profit and loss report, while the principal is made towards your loan balance which will be in your liability section of your balance sheet.
Use Checks or Credit/Debit Cards Instead of Cash
Cash makes it harder to keep track of spending. Misplaced receipts, forgetting to document purchases all can be avoided if checks or debit/credit card payments are made. Not only will you have the amounts available to record, but you will also have details on uses of funds.
Reconcile all Business Bank & Credit Card accounts every month
This is one of the best business practices to employ! Reconciliation is a fundamental aspect of bookkeeping. Not only will you be able to catch any mishaps that occur; it will spread your workload and keep your books up-to-date-and accurate. Also, any mistakes on the bank’s or credit card company’s part that are not caught within six months, will not be able to be resolved. If you look on your statements, you will see that the banks include a reconciliation sheet and recommends that you reconcile your numbers with theirs. Reconciliation is the only way to ensure your numbers are accurate and your bookkeeping on par.
Let Payroll Specialists Handle Your Payroll
Payroll and payroll taxes can be complicated/intricate and not only do you need to ensure your employees paychecks are precise, but you must make correct payroll deposits as well as file accurate taxes. Payroll specialists are trained especially for this, and so they know the ins and outs, and are fully equipped to get this done accurately.
Keep a Proper Filing System in place
Not only is this good business practice, but you do not want to drive yourself crazy trying to find one document that is urgently needed – pronto. As a “do-it-yourselfer” it will greatly benefit you to keep a proper filing system where you will file all documents and paperwork in a manner that makes them easily retrievable.
Keep an Eye on Your Cash Flow
Cash is King for any business, and the lack of it is the reason so many small businesses fail. Know how much it takes to keep your business running on a monthly basis! Devise an accurate system of expenses and monthly obligations, and weigh them against your reliable monthly inflow of cash. Include an extra 20% of total expenses to your expenses for a bit of “cushion”. A budget and forecast report is a huge plus to create, maintain, and use as a financial guide.
Give Your Customers Options to Pay You
Providing your customers with a variety of payment options will not only make your customers happy as far as convenience, but it will allow you to get paid more quickly. In today’s fast paced world, convenience goes a long way! Some customers may procrastinate writing that check AND mailing it, or setting up that online bill pay. Allowing them the option to pay you via your submitted invoices will be a huge plus in helping your cash flow.
Invoice Customers on Time
The sooner you bill your customers the sooner you will get paid, and that will also help keep your cash flow up and your budget on track.
Pay Bills on Time
Pay attention to those vendors who are sacking a late payment fee to late payers. Take advantage of those terms of payments you get, but make every effort to meet them. The delay will help with your cash flow, but may accrue interest if not paid on time.
Have your vendors submit a completed and signed W9 form
For vendors to whom you have paid a minimum of $600 and above during the year who are not a corporation, you will need to report their payments to the IRS on from 1099-Misc at the end of the year. You will need specific information from them to include on this form such as their mailing address and tax identification number. It is best to keep W9 forms on hand, so that you can have your vendors complete them at the time you realize that the monies you are paying them are at this threshold. You should check your vendor balances to see if the monies you have paid them are amounting to $600 and above, as you may often write a check for under six hundred but may make more payments to them amounting to $600 and above throughout the entire year. Waiting for year-end to collect this information may be a daunting task, which many times – from my experience, has proven futile. You cannot file form 1099 without the vendors tax identification numbers, and of course you will need to mail their copies to them. If you pay your vendors through a Payment Portal such as Paypal or with your credit card, you will not be required to file or include those amounts on your 1099 as these companies are already reporting them on their 1099k.
If you have a system that allows you to quickly and easily retrace your company’s financial activities, your record keeping is effective. This includes keeping your invoices and checks in numeric order, not skipping check or invoice numbers, and keeping bank and credit card accounts separate. You should be able to retrace a year or years and have a clear trail of your company’s financial activities.
The best way to work as a “do it yourselfer” and not be overwhelmed, is to always keep every area of the business up-to-date. Designate a time to get the tasks that can be done later such as recording reimbursables and paying bills, and do the ones that cannot wait – such as Invoicing and attending to your customers first. Create a monthly chart with a daily workflow that you will be able to model everyday, and stick with it.
It is fast approaching year-end, and now is the time to take stock of your financials as far as your bookkeeping, especially if you are a one-man show. Yes, there are three (3) months to go before we actually hit the end of the year, but wasn’t it just year-end and tax time? Not quite sure where time is going, but the next three months will pass just like a breeze, and tax time will be here again not long after. Here are a few things you can start doing right now:
Create a filing system, if you don’t already have one, then organize and file your receipts, bank and credit card statements, and other paperwork. This will make it easier to retrieve information needed from them at any time, and also to stay complaint with tax rules. All year long, you receive paperwork and some of it will be needed to prepare your tax return. If you have not been, and do not file them away in an organized fashion, you will have difficulty locating them when they are really needed. The key is to choose a filing system in which you can easily file and subsequently retrieve documentation when needed, and use it. The biggest hassle at tax time is getting all the documentation together. Maintaining your documents in an organized fashion will not only help you avoid missing valuable deductions to which you may be entitled, but will also help ensure that your income tax return is complete and accurate.
Enter all transactions that have taken place since the beginning of the year in your accounting software, or on your excel sheet, if you are a spreadsheet user. I do not recommend spreadsheets be used as your main bookkeeping tool, as it is very limiting, and allows for more mistakes to occur. However, if your CPA or tax preparer has been and continue to accept your spreadsheets without complaints, then you should probably continue to use them. On the other hand, if your CPA or tax preparer has been ignoring you and not preparing your taxes on time after you have submitted your spreadsheet info, you can opt to use one of the many accounting software available on the market for desktop as well as online or “in the cloud”. Some of them will tell you to have a bookkeeper crunch your numbers, but others will push yours aside, and work on their clients with accounting-software-prepared reports first. Accounting software are more versatile, and you are able to generate all the relevant reports that a CPA or tax preparer requires. Also, reconciliation is one of the most important steps in keeping accurate books, and while it is possible with spreadsheets, it is more convenient and less error prone when done using accounting software.
Reconcile your bank and credit card accounts from the start of the year to date, so you will not be backed up and out of synch at year end. It is always advisable to reconcile your accounts on a monthly basis, not only to stay updated, but especially to ensure there are no mistakes on either side, and if there are, to catch and resolve them immediately. Reconciliation ensures that the bank and credit card numbers are in synch with your numbers; as such, you must keep a record of all your transactions, and reconcile them against your bank and credit card statements. Humans are prone to err and so are credit card companies and banks.
Review your customer accounts to ensure their balances are accurate, and also to locate possible bad debts. If you have a customer or customers that you believe are not likely to make good on past due amounts, now is the time to write off those bad debts as a loss on your books – accrual based accounting only. (For cash basis accounting, you can simply void the invoices deemed non-payable, as they are not included in your income.) Writing off bad debts may not be a total loss as you will be able to take a deduction for them providing you can show that:
The debt is bona fide – you have a contract between you and the customer that shows you provided goods and/or services to the customer, and expected to be paid or repaid. If you do not have a written contract but have an Invoice along with correspondence to show that you have been communicating about the debt and there was a promise to pay, then that should suffice as proof that the debt is legitimate.
You have a basis in the debt – you already included the amounts owing in your business’s gross income. You have to treat the money owed as paid, in order to make a claim for bad debt deduction. This happens when you do the write off and transfer the debt from owing to paid – from accounts receivable to bad debt expense.
The debt is business related – your Invoice and written communication should be enough to prove the debt is business related.
The debt became entirely or partially worthless – you have to show that you took all reasonable steps to collect the debt. Reasonable steps could be multiple emails and/or phone calls on various dates, you do not have to sue the customer in court.
Review your vendor accounts to ensure the balances are accurate, and to get caught up on any monies you owe that may be incurring interest. It is always good to stay on top of vendor accounts, at least on a monthly basis, especially those that attract interest for late payment. However, if you review and make overdue payments now, you may be able to save a few dollars in late payment interest. Also, if you have purchase orders for which you have received items but not yet billed for, now is a good time to get the numbers in for those inventory.
Make contact with vendors who are eligible for 1099 and ensure you have their pertinent information from which to generate their 1099’s as well as correct addresses to mail them. If you paid anyone for services amounting to $600 and above during the year, you are required to issue them a Form 1099 by January 31st of the following year, and you cannot file them without each contractors social security or federal ID number and accurate addresses. Form W9 should be given to new subcontractors and independent contractors to complete and sign upon hiring, but if you have not done so, now is the time. You do not want to have the hassle of tracking down subcontractors at year-end when the information is urgently needed, and you are extremely busy.
If your business has undergone any changes and you are not sure how it will affect your taxes, schedule a consultation with a CPA. You will obtain advice relevant to your business as well as information that can save you time and money at tax time.
Whether you are an individual with a W-2 job, a self-employed small business owner who earns 1099 income, or an established business with employees, now is a good time to review your current tax and financial situation – and look ahead at the rest of the year and into upcoming tax season. If you stay on top of your bookkeeping, you will have a hassle free tax period.
The above-mentioned are just a few things that you can do to help set the tone for a hassle free tax period, and are by no means exhaustive. You can assess your business based on its type, and needs, and start taking stock now instead of later.
A shredder is one of the most essential items for any business or individual to have and use, yet one that is highly overlooked. Confidential information are almost always included in our correspondence, and some of them are not always necessary to keep. These unwanted paperwork are often tossed into the trash without any thought about how they will be handled or where they may end up. With identity theft on the rise, extra precautionary measures must be taken to minimize the risk of you being the next victim. Anything that can identify you, or any financial account papers that you have, must be shredded beyond recognition. Today’s identity theft criminals are highly sophisticated, and getting your information in their hands could change your financial landscape and possibly take you months and sometimes years to recoup.
Important Shredder Features:
Cross-cut capability – some shredder simply take sheets of paper and cut them into dozens of long, narrow vertical strips the length of the page and although it is difficult to reassemble these strips, it is not impossible! Purchase a shredder with cross-cut capability, which cuts these strips horizontally as well as vertically, or a cross-cut shredders that cut paper into micro diamond-shaped pieces which are even more challenging to reassemble. Shredders with intricate cutting patterns are way more secure.
Multiple pages simultaneous shred – shredders are rated by how many pages they can shred at a time. For example, a single-page shredder requires you to insert only one page at a time. A ten-page shredder will shred a stack of ten pages at a time, and so on. A higher page rating means less work for you, as well as a lower risk of running the unit at its maximum capacity which can cause overheating over time with excessive use. Think about it! A unit rated for ten pages requires ten insertions to get rid of a stack of 100 pages, while a single-page unit requires 100 insertions!
Ability to Shred Credit Cards, Compact Discs, and Staples – simply cutting up old credit and debit cards into small pieces and tossing them in the garbage is not a proactive way to safely discard of your cards. It’s very easy for ID thieves to reassemble and use them, especially if the card being disposed of is a replacement card with the same account number as an existing card. Most modern shredders can shred credit cards with the same cutting efficiency that they shred paper, with the only exception that they must be singularly inserted. Some shredders can also shred CD’s and DVD’s that may house sensitive financial or personal information.
The point here, is to purchase and use a shredder to get rid of your documents you no longer need that contain highly sensitive information. Why take unnecessary risk when there is a simple solution?
In the same way most of us get out of bed each day and look forward to carrying on our productive lifestyle, there are some who get up with the same enthusiasm to set in motion their disastrous, destructive plans of varying degree such as hacking. You may have already been directly affected by the password thefts at LinkedIn last year or Evernote this year, or have had your own social media account, email, website, network, or computer hacked. What’s worse is that many of you have been hacked but don’t even know it.
So how can you minimize the damage and risk of hackers? Below are several tips – some familiar and some not so much. As you go through the list, check off the ones you’re already doing and make a list of new ideas to implement to protect your business and personal assets.
Don’t Sign Your Life Away
Your signature might look great in a graphic in your email signature line, your website, or your newsletter, but it’s a huge risk. You’re giving away your handwriting, and forgers can easily replicate, master your handwriting, and impersonate you. To reduce identity theft, don’t publish your real signature anywhere.
Help Secure Your Money
Implement strong passwords on all of your financial accounts: banks, credit unions, PayPal, credit cards, and your accounting system. Of course it’s painstaking to keep up with the various passwords we use on a regular basis, but do not use the same password for your financial accounts anywhere else, especially on social media! If possible, use a different password for each account to further reduce the risk of all of them being hacked.
Put Some Thought Into Your Passwords
Do not use your name, your pet’s name or your kid(s) names in your passwords. There’s just too much information available publicly to do that safely anymore.
Use a mixture of letters, numbers, capital letters, and special characters – if they are allowed.
Make passwords long! The longer the password, the more secure they will be.
Change passwords at regular intervals – on a quarterly basis minimum, to be on the safe side.
Password Storage
Most apps that help you save time with passwords are NOT safe! Here’s what I do and don’t recommend:
DO:
Password-protect your computer, even though you don’t have to.
Keep a separate file of your passwords on your computer, but DO password-protect that file and make sure it is not shared with anyone on a network. Also, name the file something totally unrelated like fishing trip, my letters, or favorite recipes; do not name it “passwords.doc!” You can also opt to keep a record of your passwords offline, but be sure to lock it up in a safe.
When you make file and disk backups, be sure those are locked away and password-protected too. They will no longer have your computer’s password to protect them.
DON’T:
Don’t give in to your browser or any website when they ask to remember your user ID and password, especially for your financial accounts or client information. All of the major browsers have been hacked – Internet Explorer, Chrome, Firefox, Opera, and even Safari.
If you use password management applications, proceed with caution. Be sure you have properly vetted their security claims. Most of them are simply form fillers that are not safe.
Maintain Active Subscription to An Internet Security Suite
These software are designed to not only get rid of malware, spyware and other hacking devices, but also to detect upon attempted intrusion and block them all. Software such as Norton Internet Security
are the best at keeping your computer and personal information safe. I have used it for years and continue to do so because of its tight security measures and reliability to protect my privacy.
Monitor Vulnerable Applications
Avoid leaving vulnerable computer ports open and unattended, including: chat, messaging, FTP (file transfer protocol), Skype, webinars, Google hangouts, video sharing, and such like. It’s like having all the doors and windows of your home unlocked; an intruder has a lot of choices for easy entry. When you are on these more vulnerable connections, shut the others down and close the applications you don’t need. You should also ensure you logout when you are done using the program or will step away for a while.
Install Your Software Updates
As soon as a hacker has found a new exploit, the software companies will learn about it and make an update available within days. The hacker community is tight; other hackers will look for software that is not updated and exploit the hack. Avoid the copycat hackers by staying on top of your software updates; not just your anti-virus, but also your Microsoft and other similar software updates. Doing this, will eliminate a great deal of the risk out there.
Separate User Accounts
If multiple team members need to access your software, consider setting up additional users rather than having one account. If one person gets hacked, the others will likely still have access and can react quicker to the intrusion.
Take Advantage of Two-Step Verification
Opt to use two (2) step verification system, even if it is not mandatory. You know those annoying security questions that you have to setup and must answer in order to gain access to some bank accounts online? Those are mandatory, thank goodness! But there are many other instances where it is not a requirement but optional; opt to use them as they are only meant to further secure you and your personals.
When you sit down at your computer or fire up your latest device, security is probably the last thing on your mind. You want to check your email, catch up with friends on social networks, play some games, purchase online goodies, or just attend to your business. The problem is, you actually need security! That new game, may be infected with malware, and the hilarious post from your best bud may actually have been planted by a hacker. If your computer and devices are not protected, neither are you; a data-scraping bot could well use your online shopping trip to steal your credit card info. and create havoc in your life.
Make the necessary changes, and stay safe out there!
Depending on the type of business you are operating, you may not have a vast amount of bookkeeping to be done on the first day – or even week you open for business; however, you should setup a bookkeeping and accounting system at your earliest, and make an effort to document all transactions starting on the very first day. This may not be an easy feat since you are just starting up, but in order to not get lost in your financial tracking and status, and also be in the right with the relevant tax authorities, you need to get an early grip on your record-keeping.
In addition to the abovementioned tip, here are a few more you can really use as a startup and moving forward:
Consult with a CPA
If you do not have an accounting background and possess little to no knowledge of accounting and accounting principles, you should consult with a Certified Public Accountant who will be able to advise you based on your business type and stance, on how to proceed. Be sure to inform them of all the important aspect of your business such as financing, loan notes, number of employees, theft protection, budgeting, etc. CPA’s are more expensive than bookkeepers, but they are better equipped to give pertinent advice and information for any business, because of their depth of study and experience. They will not be entering your transactions as a bookkeeper would; however, they will liaison with your bookkeeper or whoever is doing your bookkeeping to get the most effective system in place. Bookkeeping is necessary on an ongoing – often daily basis, but you can opt to engage a CPA on a quarterly basis and then at year-end in order to cut cost.
Small Business Development Corporation article “10 Questions to Ask Your Accountant” – questions you can ask your CPA within a couple of years.
Use software to handle your bookkeeping
Software is very convenient and versatile because they can do so much. Bookkeeping and accounting software are designed with bookkeeping and accounting in mind, and as such incorporate all the features that great bookkeeping and accounting require. You can of course use Microsoft’s Excel to enter your data; however, it will not be equipped to produce various reports about different aspects of your business as software such as Intuit’s QuickBooks would. In other words, documenting in Excel is better than not documenting at all, but using a system specifically designed for bookkeeping and accounting will yield better results in the short as well as long term. Your business may outgrow Excel, but it will not outgrow QuickBooks or Sage Peachtree for example. There is always the option of delegating or outsourcing your bookkeeping. You may have an employee upkeep your bookkeeping in your software system, or you can enlist an independent contractor or bookkeeping company to handle your bookkeeping remotely. I often recommend QuickBooks Online because it is so versatile, user-friendly, and convenient. You or your employee could be using it, at the same time your outsourced bookkeeper is making updates and reconciling.
Keep your business and personal matters separate
That starts with having separate bank and credit card accounts for your business that are used solely for business purposes. This will make it easier on your bookkeeping, saving you the headache of having to remember what transactions are personal vs business, and also allow your personal to stay personal in the event you are audited in the future. If you interchange business with personal and vice versa, and you have a business audit, you will be required to submit your personal information as well which can result in your personal being audited as well.
Setup an effective filing system and maintain it
A filing system is one of the most important components of any business. Invoices or sales receipts are going out and bills or purchases receipts are coming in, as well as purchase orders, estimates, statements, etc. In order to be able to access any of these, at any given time, they have to be stored in a designated place where anyone requiring them can retrieve them in a matter of seconds. There are several methods of filing system setup, but regardless of the one used, the important thing is to be able to locate whatever is needed at a moment’s notice. Customer Invoices does not need to be filed in paper form especially if they are done using a software and sent via email; however, bills and purchases receipts should either be scanned and filed on your computer or an alternate storage system, or be filed in paper form by date, vendor, or a reliable method of your choice. It is also critical to file bank and credit card statement together with their monthly reconciliation reports on a monthly basis, in a location where they can be easily retrieved. You will see as you go along the necessity of this.
Having a filing system and not maintaining it will absolutely defeat the purpose of having one in the first place. If files are removed for whatever purpose, they should be replaced as soon as they are through being used. If documents from the file need to be sent somewhere, it is advisable to make copies. This way you will not lose track of important paperwork.
Institute a sequential numbering system for Invoicing
If you are issuing invoices to your customers, there must be a way that both you and your customer can reference individual invoices. Applying numbers to your Invoices in sequence or order will facilitate easy tracking and follow up. I have seen this on quite a few occasions, and this is the epitome of error and confusion.
Access as much resources as you can – especially from your bank
If you are a “one man show” like many startup businesses, you can easily become burnt out and overwhelmed with the tasks that are not the core of your business, yet necessary and fundamental to having a fully functional business. In situations like this, simple things like having your bank attach copies of presented checks to your statements as well as give you detailed printouts of your deposits, could really take the edge off and make it more convenient for you when you are ready to enter or verify information. You can also ensure your bank facilitates downloads to software such as QuickBooks which can eliminate unnecessary time spent manually entering every single transactions. You will still need to review, but with only a couple clicking of the mouse, you can save up to four times the time it would take to enter it all. Using your bank’s “bill pay” feature is another great way to save time, as well as allow more detailed information to be downloaded from your bank. As a “one man show”, working smarter instead of harder will get you through more smoothly. Think about all the institutions you do business with and how best they may be of service to you, and use them.
Designate a specific area for your business – If home-based
If you work out of your home as many startup small business owners do today, create a distinctive space that is your business space. You can benefit greatly from this come tax time, but it is also crucial to have that space in the event of an audit. In addition, depending on the type of business you operate, you may have occasional customer visits and it will be much more professional to have a secluded designated area away from family distractions and disturbances.
Document business expenses incurred prior to your first day of business
Many businesses either borrow money from outside sources for their business startup or use their own funds as loan or investment. These incurred expenses need to be recorded regardless of the source, in order to have accurate books. If you borrow from an outside institution you will need to keep track of the amount so that you can make proper and on-time payment(s), and also record loan interest which is usually added to the principal loan – periodically. If you loan your own business money, you will need to record it, so that you will be able to repay yourself once the business starts making solid profit. For monies invested in your business, you should document for the same reason and especially to make your balance sheet more appealing in the event you require a loan in the future. Financial Loan Companies are more apt to grant loans to businesses that the owners have invested in. You may also be able to write-off some of the cost for that tax year, or have them depreciated over a number of years depending on the amount. For all these reasons, it is important to input incurred expenses in your financial recording.
Request a completed W9 Form from all eligible vendors
You are required to file 1099 Misc forms at the end of each year for all individuals, as well as businesses that are not Corporations, to whom you have paid $600 and upwards via a check. If you use other methods of payments such as debit card, credit card, Paypal, or other third party payment network, you should not report those payments or portions of payments as those agencies are required to report them on form 1099-K. The form W9 is to be fully completed with the vendor’s identifying number, address, and signature affixed. I am including this in the startup as I have seen how difficult it can be when trying to reach vendors at the end of the year when the forms are due to get this information, and how futile it turns out many times. Try and get this information as soon as you realize you will be making qualifying check payments to a vendor. It only takes a few minutes to complete this form, and it will save you the headache and extra effort put into locating them at year-end.
Generate proper payroll for employees instead of writing checks without payroll deductions
This is extremely important for businesses such as Daycare Centers where there is a requirement for a proportion of kids per adult supervision. If you are enrolled with twenty children for example, you cannot be the only caregiver, and must be reporting payroll deductions to the relevant authorities. Not having any payroll, or only yourself on payroll is a huge red flag and will most definitely summon an audit at some point. There are many payroll software on the market that you can use to get your payroll done, and also payroll companies such as ADP and Paychex that are designed to help small businesses pay their employees as well as remain compliant with tax agencies. Have your prospective employee(s) fully complete and sign form W4 which will ensure you have accurate information from which to setup their payroll account and make correct deductions and payroll. You must also file a new hire report with the relevant tax agencies in your State.
Starting your business is exciting, and there will be a number of core things to sort out and get through; however, in the rush to get your business off the ground, do not relegate your bookkeeping to the bottom of the “to-do” list. Find a way to incorporate it into your daily or weekly routine. Remember, there is always delegating or outsourcing! Not all tasks can be delegated or outsourced, but bookkeeping is one such task that most definitely can be. Start your business on the right footing, and continue in order to ensure its health, stability, and success.
Running a business can be exhausting, and many business owners find it very hard to delegate miniature tasks and let go – fully, of those tasks. Fully, meaning letting go of tasks and not the entire business; letting go of the task(s) given out to be done without hovering or hindering the process.
For example, I got a call a few days ago from a concerned small business owner on the upper east side of Manhattan saying that some of the transactions she is entering into QuickBooks is simply disappearing and nowhere to be found.
When I got there she opened the QuickBooks file in question, and indicated to me all the transactions she entered and where they should have been. I told her not to worry that I would find the transactions, especially because it is impossible for them to just vanish into thin air.
I have been using QuickBooks for such a long time that it did not take much time for me to realize that there had to be another file housing the “missing” transactions, and so I set out to view the other QuickBooks files that are on the Mac. She, however, proceeded to impede me from exiting the current QB file in question and from opening other QB files, constantly informing me that “none of those are the one in question, this is” which kept me from getting to the source of the problem and finding a solution. Within about 20 minutes of me just sitting there looking around the QB file that I know will not solve the issue, she was getting very frustrated saying, “I told you they are nowhere to be found, you cannot solve it!” She then started pacing, and taking phone calls and during her brief episodes of distractions I was able to look at the files in date order to determine the latest ones used.
The problem was just as I thought!
She was using three different QB files to enter her data, and of course there were like 10 transactions in one file, then the next 17 in another, and another 38 in the next. She was using a Mac and it is very easy for a situation like this to happen because of the way QuickBooks for Mac works. Unlike the PC versions, each time QuickBooks is backed up on a Mac, it creates a different backup file with a “Disk Image”. This makes it particularly easy to use a different QB file each time an update is done, without actually noticing until you really need to. That is one very big difference between the Mac and PC versions of QuickBooks.
I then summoned her over to the computer, showed her the “missing” transactions in question, and explained to her what was happening. She was ecstatic, and of course I was happy too that I had solved the “huge” problem she thought no one could, but I had to bring it to her attention that if she was there redirecting me each time I try to do what I am best at, the problem would not have been solved. What could have, and would have taken me a few minutes, ended up taking over an hour.
My point to small business owners or any person seeking assistance, is to give professionals in fields you do not specialize, a little room to do what needs to be done to help the particular situation. You can sit and watch, especially in instances where you feel your privacy could be breached; however, do refrain from directing a process you are not knowledgeable about – one you have sought help for. Think about it, if you could have solved it, you would!
or this 
will store a copy of your information for easy retrieval, and save you the headache of ever losing your information that you have worked so hard at compiling.
Create a 
Enter all transactions that have taken place since the beginning of the year in your accounting software, or on your excel sheet, if you are a spreadsheet user. I do not recommend spreadsheets be used as your main bookkeeping tool, as it is very limiting, and allows for more mistakes to occur. However, if your CPA or tax preparer has been and continue to accept your spreadsheets without complaints, then you should probably continue to use them. On the other hand, if your CPA or tax preparer has been ignoring you and not preparing your taxes on time after you have submitted your spreadsheet info, you can opt to use one of the many accounting software available on the market for desktop as well as online or “in the cloud”. Some of them will tell you to have a bookkeeper crunch your numbers, but others will push yours aside, and work on their clients with accounting-software-prepared reports first. Accounting software are more versatile, and you are able to generate all the relevant reports that a CPA or tax preparer requires. Also, reconciliation is one of the most important steps in keeping accurate books, and while it is possible with spreadsheets, it is more convenient and less error prone when done using accounting software.
Reconcile your bank and credit card accounts from the start of the year to date, so you will not be backed up and out of synch at year end. It is always advisable to reconcile your accounts on a monthly basis, not only to stay updated, but especially to ensure there are no mistakes on either side, and if there are, to catch and resolve them immediately. Reconciliation ensures that the bank and credit card numbers are in synch with your numbers; as such, you must keep a record of all your transactions, and reconcile them against your bank and credit card statements. Humans are prone to err and so are credit card companies and banks.
Review your customer accounts to ensure their balances are accurate, and also to locate possible bad debts. If you have a customer or customers that you believe are not likely to make good on past due amounts, now is the time to write off those bad debts as a loss on your books – accrual based accounting only. (For cash basis accounting, you can simply void the invoices deemed non-payable, as they are not included in your income.) Writing off bad debts may not be a total loss as you will be able to take a deduction for them providing you can show that:
Review your vendor accounts to ensure the balances are accurate, and to get caught up on any monies you owe that may be incurring interest. It is always good to stay on top of vendor accounts, at least on a monthly basis, especially those that attract interest for late payment. However, if you review and make overdue payments now, you may be able to save a few dollars in late payment interest. Also, if you have purchase orders for which you have received items but not yet billed for, now is a good time to get the numbers in for those inventory.
Make contact with vendors who are eligible for 1099 and ensure you have their pertinent information from which to generate their 1099’s as well as correct addresses to mail them. If you paid anyone for services amounting to $600 and above during the year, you are required to issue them a Form 1099 by January 31st of the following year, and you cannot file them without each contractors social security or federal ID number and accurate addresses. Form W9 should be given to new subcontractors and independent contractors to complete and sign upon hiring, but if you have not done so, now is the time. You do not want to have the hassle of tracking down subcontractors at year-end when the information is urgently needed, and you are extremely busy.
If your business has undergone any changes and you are not sure how it will affect your taxes, schedule a consultation with a CPA. You will obtain advice relevant to your business as well as information that can save you time and money at tax time.
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Document business expenses incurred prior to your first day of business
Request a completed W9 Form from all eligible vendors
Generate proper payroll for employees instead of writing checks without payroll deductions
