Retained Earnings, also known as “Accumulated Earnings” and “Unappropriated Profits” is one of the most important items on the balance sheet of a business financial statement. It represents the percentage of net income that is not paid out as dividends, but instead is kept “in-house” by the company.
Any item that impacts net income or net loss will impact retained earnings. Examples of items that would impact retained earnings include: sales revenue, cost of goods sold, depreciation, and general operating expenses.
How To Calculate Retained Earnings
Retained earnings is calculated by adding the net income from the current period to the retained earnings from the previous period and then subtracting any net dividends that were paid to shareholders.
It is calculated at the end of each accounting period and is based on the previous period’s figure. The resulting number can be positive or negative, depending on the company’s net income or net loss over time. A company with negative retained earnings has failed to earn a profit for a predetermined period, and is therefore retaining its losses. Failing to make a profit is not an uncommon occurrence for a business since failures will happen from time to time. However, if a company fails to earn a profit over several successive periods, the business owner should carefully evaluate the business, their earning potential, and the ambitions of the company.
What Retained Earnings Reveal About Your Business
Retained earnings can reveal much about a company. They are an important indicator of a company’s financial health and business performance. For example, a high and positive retained earnings might be a sign that the company has a strong business plan; however, a company with a history of low retained earnings may be able to access more financing.
How Retained Earnings Can Benefit Your Business
Knowing the amount of retained earnings can help a business owner understand the financial goals of the company. If a company has a high retained earnings, the owner can decide to take a larger percentage of investment income to support the company and reduce retained earnings balances.
Rather than distributing the profits to the owners, the retained earnings can be used to reinvest in the business or to pay off any debts the company may have.
The retained earnings account is important because it shows how much profit a company has made over time and how much of that profit has been reinvested back into the company.
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Source documents are any original financial records that serve as a paper trail to support your bookkeeping transactions. These documents may include – but are not limited to – company purchase orders, packing slips, supplier invoices, cancelled checks, cash receipts, cash register tapes, bank and credit card statements, and employee time cards.
These records are what allow your bookkeeper or accountant to prove the legitimacy of journal and general ledger entries. And while it does not really matter if your source documents exist in the form of hard copies on paper, or in an electronic format, what does matter is that:
all corresponding bookkeeping entries are made in a timely and accurate manner, and
one of the defining factors of whatever filing system you’re using is the easy retrieval of clear, complete, legible copies of all your original documents
Scanned and photocopied receipts are generally acceptable from a tax audit point of view.
Managing Your Source Documents for Tax Purposes
According to the IRS, all your business records (meaning any documents that support “an item of income, deduction, or credit shown on your tax return”) should be kept for a minimum of two years, up to “indefinitely” – depending on the activity they support. In fact, it is a possibility that your business could be selected for a tax audit in any given year and that’s also one of the most important reasons for keeping these records readily available.
During an audit, governmental tax investigators are responsible for verifying the accuracy of income and deductions reported on your company’s tax returns. Because this is typically accomplished by examining a representative portion of your accounting transactions, part of the auditor’s investigation will also include scrutinizing related source documents.
Wherever possible, your source documents should include:
the dollar amount of the transaction involved,
the date it occurred,
who participated in the transaction, and
why the transaction was made
The period of time prescribed for document storage by the IRS does more than just aid their assessment of additional taxes down the road. Storing your files appropriately also allows your business to amend previous tax returns to claim refunds or credits that might have been missed.
More Benefits of Good Record-Keeping
Keeping your source documents, accounting records, and other financial paperwork available for future reference extends beyond your tax obligations. It also forms part of a smart business strategy. The review of your company’s records plays a key role in any business audit – including the ones that typically accompany an acquisition, merger, or sale.
It’s important to think about your accounting activities as part of a much bigger infrastructure. Every bookkeeping transaction your company engages in – and every source document involved – helps lay the foundation for accurate financial records, and thus accurate reporting.
Should you ever reach the point where it makes good business sense to join forces with another organization – or to leave your company behind altogether – you’re far more likely to meet your objectives if your records are intact, up to date, and accessible.
Let’s say your long-term strategy includes an exit plan that revolves around selling your business. It only makes sense that potential buyers will want to find out as much as possible about your company’s finances. In fact, a huge part of the commercial sales process includes opening your books to interested parties so they can investigate your profit history and forecast future revenue.
Among other things, this process could involve examining your company’s:
past tax returns,
assets (both tangible and intangible) and liabilities,
cash flow projections, and
profit and loss statements
The inherent value of these types of business records stems directly from your bookkeeping habits. The more stringent your company’s accounting standards are over the years, the more useful these records become.
The last thing you want as a business owner is to miss out on a viable opportunity – planned, or unplanned – because you failed to keep your financial house in order. Source documents – and the records they are a part of – are instrumental in the creation of financial statements and reports that help you to make good business decisions.
So rather than feeling frustrated or becoming irritated next time your bookkeeper hounds you for that missing receipt, remember that helping your accounting professional perform their job better is a solid investment in your company’s future. It is to ensure both you and your bookkeeper are on par with the numbers you are compiling and they are inclusive and accurate.
If you are looking for exceptional bookkeeping services in New York, APO Bookkeeping has you covered. We streamline your bookkeeping processes, ensuring that everything is kept updated, manageable, and above all, effective. Let’s have a chat—reach out to us today to learn more.
There is so much you can get from Excel spreadsheets, and no more! Don’t get me wrong, Microsoft’s Excel has its many purposes one of which is capturing information and making calculations including statistics with useful bars and graphs resulting in eye-catching, aesthetic presentations; however, it does not have the capacity to convert information from one report type to another, reconcile entries, or provide real-time bookkeeping and accounting stats, and therefore cannot provide the cross-reporting intelligence analysis that businesses need in order to facilitate strategic planning and make good business decisions. It is not enough to know how much profit has been made thus far for the current year, or how much your current expenses are; businesses must be able to look comprehensively at their business stance at any given moment, if being successful and staying in business for the long haul is their main goal.
Use an Integrated Financial Solution Software for All Your Business Accounting Needs
This is where cross-reporting, intuitive, integrated financial solutions software such as Intuit’s Software – QuickBooks, and Sage Peachtree come in. With an integrated financial solutions software, you enter the information once, and you get to use that same information in a variety of ways to pull insightful reports including, not only Cash Flow Analysis and Profit and Loss reports but also Previous Year Comparison Reports that can help you see where you have been, the strides you have taken, and how best you can improve your game plan moving forward. With Microsoft Excel, you will need to enter the information more than once – even if it means copying and pasting field items and re-configuring codes, it is very time consuming, non-productive, and limiting. According to Fran Burns – Contributor at CFO Tech Outlook, “It’s time to stop ignoring the ‘elephant in the room’ and focus on integrated solutions that enable one version of the truth.”
“The number one disadvantage of using Microsoft Excel for accounting is the lack of its ability to reconcile accounts, which is the most important aspect of accounting.” Eugénie M. Nugent
As a liaison working on the front line bridging the gap between many CPA’s, CFO’s and their clients, I have seen firsthand the dilemma they are faced with from clients who refuse to use anything other than Excel for their accounting, yet require accurate financial analysis and advice from their CPA’s and CFO’s based on the limited construct of Excel spreadsheets they have tabulated. As I have come to realize, many of these clients choose to stick with spreadsheets because they are intimidated by these software; even when they have delegated their bookkeeping, they feel a sense of not knowing what is going on behind the scene, and this unfamiliarity has kept many of them from stepping on board the integrated financial solutions software train. I have the responsibility to steer those clients to the right software, in order for them to be able to get what they need as far as their personal or business financial analysis – which their CPA will not be able to provide them with – if there financials aren’t compiled in a way such that relevant reports can be accessed and generated, and so I have developed one-on-one customized training modules for these business owners using QuickBooks, which has resulted in a paradigm shift.
Microsoft Excel is a multidimensional, multifaceted macro programming language software that has earned its place in the business world and the world in general; however, it is not an accounting software – was not designed with accounting in mind, and therefore should not be used as your main accounting tool. If you are a business owner who is serious about having the right information to help you make good business decisions, you must use an integrated financial solutions software for your accounting. If you must use Excel in your business reporting, use it to configure and house data that you have compiled using an integrated financial solution software.
Bookkeeping and Accounting can be boring! However, it is an essential part of your business as it gives you clear information about the status of your cash flow – how much money is truly available in your bank account for spending, who owes you money, who you owe money, how your business is performing overall and so it must be done. Many business owners who handle their own bookkeeping usually update their books on a monthly or quarterly basis; however, it is important to know where you are in your business at any given time – financially, and monthly or quarterly updating will not allow for such readily available information. Bookkeeping should be done in real time! Here are some of the benefits of real-time bookkeeping:
Real Time Bank Balances
In order to give you a true view of your available funds in your bank account, you must update your books on a daily basis. The balance your bank is showing as available at any given time, may not be as accurate as you think it is, unless of course you are using an accounting software such as QuickBooks Online and ensure daily updates. Without real-time Bookkeeping and Accounting your business cannot take into account outstanding checks that might affect your bank balance which the bank has not yet processed. Say for example your bank account balance shows a balance of $15,000 but you recently wrote a couple checks to your employees for your latest payroll, and your recurring rent payment through bill pay is not yet automatically initiated by your bank. Is your bank balance still $15,000? No, the true amount available in your bank is $15,000 minus any outstanding checks. Cloud accounting software such as QuickBooks Online or Xero will eliminate this shortfall as they both do an amazing job at tracking both the bank balance as well as your true available balance. However, this can only be effective if you use real-time bookkeeping and accounting procedure – daily updating.
Real-Time Cash Flow Analysis
It is very easy to overlook information that does not directly affect your business bank account such as business expenses afforded with personal funds. Employees reimbursement or business owner reimbursement may be omitted from your reports if they are not included in real time, which will undoubtedly give you inaccurate information and possibly a false sense of cash flow security when the cash isn’t really there.
“Without real-time bookkeeping and accounting you cannot gain a true perspective of your business stance, or your cash needs.” Eugénie M. Nugent
Real-Time Reporting
Bookkeeping and Accounting on a real-time basis offers you a greater level of information than if you updated your books sporadically. It allows you to have greater insight into your business performance by knowing you can generate a Financial Statement like a Profit & Loss in the middle of the month with real updated information. This is crucial to help you better understand if you are meeting your monthly monetary goals, as well as staying within your budget. Real-time bookkeeping update will help you predict how much cash is needed for ongoing expenses you might have by the end of a particular month, for example. Your accounts receivables and payables will be included in your reports – if you are operating on an accrual basis, making your reports more inclusive and true. Without real-time bookkeeping and accounting, you cannot gain a true perspective of your business stance or your cash needs.
Reconciliation is a very important aspect of the bookkeeping and accounting process. It is also the only way to ensure your numbers are accurate. As such, reconciliation of the bank and credit card accounts should be done on a monthly basis, and a report of the reconciliation kept for your records. That said, reconciliation can be tedious especially if there are multiple accounts to reconcile and they are not done regularly. This where a software comes in handy! An accounting Software such as QuickBooks, will allow you to not only reconcile your accounts, but to easily download transactions from your bank and credit card institutions – into QuickBooks. Accounting software also allow you to have all your financial information grouped in one comprehensive system from which you can generate multiple useful financial reports. If you are using QuickBooks or thinking about using it, here are a few tips and tricks that will help you have a more pleasant, less onerous bookkeeping and reconciliation experience:
Take Advantage of QuickBooks Download Feature
QuickBooks download feature can go a long way in helping with your transactions input, as well as your reconciliations. After the initial banking and/or credit card online banking setup, you will only need to click one button called Update – periodically, in order to have your new transactions downloaded. You will need to review the transactions before adding them directly to the various QuickBooks register and accounts, but instead of manually entering all the information that pertains to each vendor or customer, you will only need to click one button for each transaction to be added to QuickBooks – in most cases. You may have to change the account that some transactions are associated with; however, that is minimal compared to entering every detail. This downloaded transactions process of easily adding information to QuickBooks, makes the reconciliation process easier. Manual entering can cause transactions to be missed or amounts incorrectly entered, but the download will enter them exactly as they should be, and so you will not spend time looking for a difference that could be due to $6,269 entered as $6,296 which is usually more difficult to locate. If you are using QuickBooks Online, you will have an added edge in matching the transactions because QuickBooks Online is Intuitive and will show you possible options for the transactions that would otherwise be elusive.
“The bookkeeping and the reconciliation process can be fairly simple if an effective accounting software is used, and proper procedures set up and followed.” Eugénie M. Nugent
Use the Undeposited Funds Feature
Reconciling the deposits on the statements with the deposits in QuickBooks can be an arduous task if Invoices were used and the payments received for those Invoices were not deposited to the bank in the amounts that they are in QuickBooks. In other words, if monies were deposited in the bank in one lump sum payment of multiple customers, and these payments were not grouped via undeposited funds and posted to QuickBooks bank register as such, it could be quite a task trying to figure out what deposits in QuickBooks make up a particular lump sum deposit on the bank statement. So, you want to make sure you are entering the transactions in QuickBooks with the reconciliation process in mind.
Resolve the Deposits Before the Checks and Other Payments
Like the deposits that are received from multiple customers and deposited to the bank in lump sum but not in QuickBooks, deposits from credit card merchants can also be problematic to reconcile. American Express, for example, groups weekend transactions together and deposit them as one lump sum deposit for the two days weekend sales, and so if you are manually recording some sales on a daily basis, that – topped with the payment portal payments can make it really difficult to match and reconcile. As you can see, reconciling these deposits could take some time, and you want to ensure sooner than later that all your deposits actually were deposited to your bank account. It rarely happens, but banks make mistakes too!
Use the Recall Transactions Feature Effectively
The recall transactions feature is a huge time-saver! After you have setup the preferences for QuickBooks to recall previous transactions information, QuickBooks will automatically recall the last transaction or account used for any vendor you have already paid. It can be a huge time-saving tool if used appropriately. For example, if you have an American Express Card, and you also accept payment through American Express Merchant Services, you can create three different variety of vendor names to make it easier to recall the transactions for each, rather than having to type in the different account information each time. Such as:
Vendor #1 could be called Amex-4566 (last 4 digits on your Amex Credit Card) – which you would use to handle payments from your checking account to your American Express credit card
Vendor #2 could be called Amex Finance Charge – which you would use to handle your finance charges assessed to your American Express Credit Card
Vendor #3 could be Amex Merchant Fees – to handle your merchant processing fees charged by American Express
By doing this, QuickBooks will automatically recall your Amex credit card payments as coming out of your checking account, Amex Finance Charges as being a bank charge expense, and Amex Merchant Fees as being a merchant processing expense. If you set up your QuickBooks this way, you will only have to make minimal changes – if any, to the recalled transactions.
“Get yourself a good accounting software, set up protocols as far as the procedures, and ensure you and anyone designated to your bookkeeping and reconciliation tasks, use them.” Eugénie M. Nugent
Reconcile The Smaller Accounts First
If you are new to reconciliation, or reconciling your accounts using a software, I recommend starting with the smaller accounts with less transactions so you can: a) get some practice, b) feel accomplished in reconciling it more quickly, and c) get a boost to take on the bigger challenge. For example, you may start with all the credit cards and loan accounts before moving on to the savings, payroll, and then the general checking account(s). Also, the larger accounts are usually impacted by the smaller accounts, and so you want to first focus on the accounts that have an impact on the general checking account(s). Another important thing to do, is to ensure transactions such as third-party payroll to companies like ADP and Paychex, are entered into QuickBooks before adding your downloaded transactions into QuickBooks. This will allow the payroll transactions to be matched up to your downloaded transactions in your download review window.
Sort The Reconciliation Screen Transactions
If you have a large volume of transactions, knowing how to find and clear them quickly is super important. QuickBooks allows for the easy sorting of transactions by amount – smallest to largest and vice versa, check number order, etc. Sorting by amount can be a huge time saver, especially when trying to match the deposits. If you have credit card merchant deposits coming into the checking account you probably have a lot of unique numbers. Sorting by amount by clicking on that column can make your QuickBooks reconciliation process much more effective while helping you work more efficiently. Also, sorting the checks and payments side of the reconciliation by check number will allow you to easily check the numbers in number order. In addition, when going through the transactions on the bank statement, it could save a lot of time if you check off the transactions by the different statement sections. There are a few banks that do not separate them, but if yours do, it could save a lot of time.
Bookkeeping and the reconciliation process can be fairly simple if an effective accounting software is used, and proper procedures set up and followed. However, it can be quite the opposite if none of this done. Get yourself a good accounting software, set up protocols as far as the procedures, and ensure you and anyone designated to your bookkeeping and reconciliation tasks, use them.
What accounting software are you using? And, what steps do you take to help simplify your reconciliation process?
Are you a small business owner trying to manage all aspects of your business on your own?
Have you fallen behind with your bookkeeping?
Do you find that your bookkeeping tasks are taking the passion out of your business?
Do you pull your hair out every time you think about keeping the books? (Well, not literally, I hope)
Let us help you! We specialize in catching up the books and then continuing to keep them updated. We have helped countless small business owners – sole proprietors, partnerships, LLCs, and S-corps – with their bookkeeping needs. Whether you’ve fallen behind (by a month or two or even by a whole year or two) or just don’t want to deal with the process of working on the books each month, we can help!
Being behind on your bookkeeping unfortunately means being behind on your business stance. If you are not monitoring your numbers in a visible form and generating insightful reports, you could definitely find yourself out of cash flow and ultimately out of business.
We provide services on and off-site to clients in the New York metropolitan region, and remotely in all other geographical areas of the continental US. We assist small to mid-sized businesses across industries.
Most small business owners are surprised to discover that our bookkeeping service packages are extremely cost-effective and our services actually lead to increased profits, reduced taxes, and improved cash flow – not to mention fewer headaches and more time for doing things you love and more hours you can use to focus on growing your business.
The fact that you are reading this means you have thought about it. But would you have been interested in a “cloud based” accounting and bookkeeping application a few years ago? Probably not! Like myself and many small business owners, you were probably still trying to get your arms around the cloud and doubting that you would ever entrust your most critical financial data to some outside company. But times have changed. Online, or cloud financial applications are slowly but surely becoming the norm, and many small business owners are taking notice, particularly because of their benefits.
There are many cloud accounting and bookkeeping applications available on the market to date for small businesses. Some of them are: QuickBooks Online, Cheqbook, Xero, FreshBooks, Kashoo, Zoho Books and Wave. Most of these programs are pretty simple to use, and with only the bare basics of accounting, anyone should be able to use them. These programs also make it easier to have someone else do your bookkeeping while you maintain your Invoicing and receivables simultaneously from anywhere there is an internet connection. They can be accessed on a smartphone, tablet, or computer. This means that you have options! You can outsource your entire bookkeeping and accounting processes, or elect to have specific portions outsourced.
Benefits of Cloud Accounting
1. Cloud Based Accounting is Safe and Secure
When it comes to your company’s finances, nothing is more important than keeping your sensitive information from leaking out, which could have disastrous effects on you and your business. With a cloud based virtual accounting solution, your data is stored on a secure server. When you need to send data back and forth, it is done using only the highest available level of encryption, which keeps the data from being read – even in the unlikely event that someone could intercept the transmission.
2. Cloud Accounting is “Always On”
O the convenience of easy access! One of the reasons that cloud based accounting is becoming so popular is that it provides a level of coverage that you could only get otherwise by hiring an entire accounting department. Most small businesses cannot afford the expense of hiring even one full time staff member, and will generally bring someone in to do the books on a part time basis as needed. That may only be once per month to a few days a month, which leaves a lot of gaps if there are critical needs on the off days. With these applications you have the option of using a virtual bookkeeper and even accountant, which will undoubtedly cost less while keeping your accounts updated. Even at nights while you sleep, your accounts can be updated. You can choose to have a team assigned to you by some of these companies for full coverage, if you prefer to have the same company personnel rather than other remote bookkeepers do your bookkeeping. Regardless of how you choose to handle your bookkeeping, using any of these cloud accounting applications will allow you and whomever you give permission, to have access to your data 24/7 from anywhere with an internet connection.
3. Cloud Based Accounting Applications are Versatile
Cloud based accounting applications have something that only the cloud can provide. Because these applications are located online, they are better able to be integrated with many other applications that are designed to work with them, offering customized solutions to various business needs. Ecommerce and payment processing solutions such as Shopify, Paypal, Square etc. work seamlessly with these programs. QuickBooks Online has the widest market of these software applications, and as such, there are many more applications available that can be easily assimilated with it.
4. Cloud Based Accounting Allows for Seamless Collaboration
Since these applications are cloud based and hosted, they allow for easy and seamless collaboration. You and your business partner, for example, may be in different locations but need to look at and discuss your numbers. These online programs make this possible!
Downside to Cloud Accounting
1. These applications often become overloaded and thus slow running, depending on the time of day. During regular business hours of 9 through 5 when most businesses are open and staff working in QuickBooks, there may be times when it becomes really slow.
2. Cloud based accounting applications are sometimes inaccessible. There may be times when you have work to do but the application is inaccessible or unavailable for any number of reasons.
3. You Cannot Backup Your “In the Cloud” Data. Because these applications are not on your system, you cannot backup your data, and will need to wholeheartedly trust these companies to have your data available whenever you need to access it.
Technology has advanced in a myriad of ways, and people who are not excited about the new way of doing things are forced to either move with the time, or be left behind. Many accounting software companies who started out with desktop accounting software are moving rapidly towards closing them out altogether. Although you may have purchased the desktop edition and it is yours to keep, you may not be able to use it the same way you usually do. For example, if you use your QuickBooks desktop software to generate payroll and depend on the updates from Intuit to get them done accurately, you will not be getting those updates anymore. If you are only using it for financial record-keeping, invoicing, etc. then you should be ok with it. Otherwise, you will need to switch to the cloud. Eventually that is the only option we will have! So, it is probably a great idea to get on board and transition sooner than later.
My Personal Preference
Desktop hosted applications. Call me old-fashioned, but I like to feel that I have control over my financial data. But what good is having the desktop software when they are no longer supported by their makers who strip away the minimal functionalities they have, such as the ability to email your Invoices through the software for quick payments, and generate your employees payroll?
As with many tax forms 1099’s can be pretty confusing, especially now with more rules – and exceptions. There are multiple 1099 types as well as forms to accommodate them, but the most commonly used is the form 1099-Misc. As such, we will focus on the 1099-Misc. Here is a shortlist on the things that you need to know about 1099-Misc – and ensuring you are doing things right.
NOTE: The deadline for filing 1099 Misc Forms (Box 7 – Non-employee Compensation) has changed effective immediately, and the new deadline is January 31st following the reporting tax year. So, the deadline to file your 1099’s for 2020 tax year is January 31, 2021 – the same date you need to issue your 1099’s to your independent contractors by. If you do not have amounts in Box 7, then the deadline remains February 28th for paper filings or March 31st for electronic filings. (See 2020 1099 Misc Form instructions on IRS website)
WHO IS ELIGIBLE FOR A 1099
All subcontractors you have paid $600 or more to in a calendar year using any payment methods excluding credit card, debit card, gift card, or third-party payment network such as PayPal.
All service-based businesses that is NOT incorporated
An LLC or an LLP business may or may not be eligible. Follow the rule “when in doubt, send it out” to be on the safe side
Unincorporated Accountants and Lawyers are eligible; do not let them tell you otherwise
WHO IS EXCLUDED FROM RECEIVING A 1099
Corporations
Anyone you have paid with a credit card, debit card, gift card or a third party payment service like Paypal
Any company you have purchased a product from, such as office supplies, computers, etc.
The first step is requesting a completed and signed W9 form from your eligible vendors. The W9 form can be downloaded here and should be issued and collected BEFORE you make any payment to those vendors who are within the specified threshhold.
Use the information provided on the signed W9 form the vendors returned to you to complete your Form 1099’s. It should have: a) the name of the individual with the dba (if applicable) if a sole proprietorship, the name of the organization if a Limited Liability Company (LLC) b) the Social Security Number (SSN) or Employer Identification Number (EIN) of the sole proprietor, the Employer Identification Number if an LLC. c) an address so you can mail completed 1099’s out to them.
Print and mail out 1099’s to vendors by the deadline – usually January 31st of the following year for the previous year reporting, and IRS 1099 forms along with a form 1096 by this same deadline – January 31st. The 1096 is a summary transmittal form of the 1099’s, kinda like a cover letter to a resume. The forms can also be efiled to the IRS by a tax professional.
APO Bookkeeping uses QuickBooks to generate 1099 and 1096 forms for mailing, and also efiling forms if the number of 1099’s are above the threshhold for mailing which is 250 plus. If you will be generating the forms yourself, you can purchase preprinted forms at your local office supply store. You cannot print on regular printing sheets and mail as the forms need to be machine-readable for the IRS, and regular printing sheets are not.
There are multiple parts to the 1099-Misc forms. Below is the breakdown and where to send each:
Copy B and Copy 2 are for the independent contractor and must be provided no later than January 31st, following the year you are reporting
Copy A must be filed with the IRS no later than January 31st whether by mail or electronic filing.
Copy C is for you to retain in your files
WHAT ELSE DO I NEED TO KNOW ABOUT FORM 1099
If your 1099 forms contain a mistake, IRS can bounce it back to you. The most common mistake is the incorrect spelling of a name, or an incorrect tax identification number. Make sure forms are issued to the “exact” name that appear on the individual or LLC’s filing documents which hopefully is what they have sent to you on their form W9.
Also, try to pay vendors only one way! Do not send your website developer a check, followed by his or her next payment with a credit card, and then paying their next bill using Paypal. If you co-mingle payment methods, it will make calculating the amount you need to input on the 1099-Misc more difficult. Visit IRS website to view Other Types of 1099 Forms and their requirements.
WHEN ARE 1099 FORMS DUE
1099 Misc form for Non-employee Compensation (Box 7) is due to the independent contractor as well as the IRS by January 31st following the tax year – whether they are filed electronically or by mail.
All other 1099 Misc box categories and 1099 form types are due to the independent contractors by January 31st following the tax year, and must be filed with the IRS by a deadline of February 28th by mail or March 31st if filed electronically.
1099 forms must be postmarked no later than January 31st of the following year for the previous year reporting, or the next business day if the 31st falls on a Saturday, for all eligible vendors. They must be submitted along with a 1096 form to the IRS by January 31st if they are for Non-employee compensation – Box 7 on the 1099 Misc form, or by February 28th if for other boxes or other 1099 forms. The 1096 form is a summary sheet that lists the total amount of 1099’s you are submitting, and the total dollar amount of all of your 1099’s combined.
You can obtain a 30-day extension on the time to file 1099’s by filing IRS Form 8809, Extension of Time to File Information Returns. The form must be filed with the IRS by the 1099 due date which is January 31. The extension is not granted automatically. You must explain the reason you need it. The IRS will send you a letter of explanation approving or denying your request. As you can see, this extension request must be filed way in advance of the due date, as there is no way to know if the extension will be granted, and if it is denied you will be penalized for filing the 1099’s late.
As always, remember to stay in the know, in order to remain compliant in your business. 1099’s are just one aspect of the many requirements business owners must take care of, and we are here to help you understand these processes and activate you to pay attention to this (requirement) segment of your business which is also your responsibility.
If you have questions regarding 1099’s or need help getting them done, we are here to help you! Contact us today so we can get started! And if you’re looking for bookkeeping services in New York, reach out to us and let’s have a chat about it.
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.
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.
Use the Right Accounting System
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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.
