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Archives for Accounting

Cash Receipts and Disbursements Not the Best Way to Determine Profitability

Speaking with entrepreneurs recently (especially those w/businesses that buy/sell inventory) I’ve noticed a lack of understanding of the difference between cash flow and net income, profitability.

Let me give you an example:

  • Business selling inventory
  • Start business by purchasing 10,000 units at $1/unit; total purchase = $10,000
  • Sell 1,000 of those units for $5/unit; total sales = $5,000

Let’s stop here for a second.  At this point, many of you might come to the conclusion that you haven’t made any money (profits).  After all, cash spent ($10,000) exceeds cash received ($5,000 sales) and so your net cash flow is negative $5,000.   This view of the facts doesn’t tell the whole story.

Let’s view the facts using simple accounting:

  • Sales                                                  $5,000
  • Less: Cost of Goods Sold           ($1,000)
  • Equals: Gross Profit                     $4,000

Some of you may be thinking how can I have gross profit when I’ve spent more than I’ve collected in sales?  Good question!  The reason is that you’ve sold each of the 1,000 units for more than you paid for them individually.  The remaining $9,000 ($10,000 initial purchase less $1,000 cost of good sold) of inventory remains on your Balance Sheet as an asset.  It is not “expensed” on your Profit and Loss Statement until the units are actually sold.

Assuming the inventory doesn’t expire/spoil (think produce or other food type products) then your $9,000 of inventory will remain at that value on your Balance Sheet and will be “costed” to the Profit and Loss Statement at $1/unit.

My point is this.  Having the proper understanding of accounting for sales, inventory and cost of goods sold would lead you to better decision making.  Let’s say these items are flying off the shelves quickly and you’re profiting $4/unit ($5 sales price less $1 per unit cost), you definitely would consider buying more inventory even BEFORE you’d recouped your initial $10,000 investment.  Waiting until you recouped your initial $10,000 investment would cause you to miss profitable sales in the interim.

Above said, any credible accounting software that has an inventory function should be able to handle the accounting properly.  I recommend Xero or QuickBooks (desktop version) to handle inventory and consult on either software.

I hope this simple example will help you gain an understanding the differences between cash flow and profitability.  I’d love to help clarify the accounting to be used for sales, inventory, and costs of good sold.

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Form 1099 Filing Requirements

Form 1099 Filing Requirements

If you made a payment during the calendar year **as part of your trade or business**, you are likely required to file a 1099 or Information Return with the IRS.

Form 1099-MISC would be issued for payments, in the course of your trade or business for:

  • Services performed by independent contractors or others that are not your employees (to individuals or other businesses) of $600 or more to each payee
  • Prizes and awards of $600 or more
  • Rent of $600 or more
  • Royalties $10 or more
  • To physicians, physicians’ corporation or other supplier of health and medical services of $600 or more
  • For a purchase of fish from anyone engaged in the trade or business of catching fish of $600 or more
  • Substitute dividends or tax exempt interest payments and you are broker of $10 or more
  • Crop insurance proceeds of $600 or more
  • Gross proceeds of $600 or more paid to an attorney

Form 1099-MISC would also be used to report direct sales of $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.

Form 1099-INT is used to report interest you paid on a business debt to someone of at least $10.

Form 1099-DIV is used to report dividends or other distributions to a company shareholder.  The minimum amount to be reported is $10.

Form 1099-R is used to report distributions from retirement plans.

**Trade or business**

If you are not engaged in a trade or business, you are not required to file 1099 forms.  A question that sometimes arises is, “do I need to give my lawn care service a 1099.”  It depends…if you pay a lawn care service to take care of your personal residence, then you are not required to issue a 1099 because there is no trade or business.  If you pay that same lawn care service to tend to your business property, then you are required to issue a 1099 unless an exception applies.

Owning a rental property constitutes a trade or business.  Paying someone over $600 for the upkeep or maintenance of your property could create a filing requirement.

Exceptions to general rule for issuing 1099s

You do not have to issue 1099s to companies that are incorporated unless it is for medical or legal services.  A company is incorporated if it is established as a C Corporation or an S Corporation.  You must issue a 1099 to a partnership or an LLC unless the business is taxed as a Corporation.  See W-9 Forms below.

If you paid someone under $600, you also are not required to issue a 1099 to that vendor.

W-9 Forms

It is a best practice for you to have a W-9 Form on file for each of your vendors.  The W-9 Form, prepared and signed by the vendor, provides information to the company that is necessary to prepare 1099 Forms.  Information includes the vendor’s name, address, tax identification number or social security number, and type of business.  If the W-9 form indicates that the company is a corporation or an S Corporation, you do not need to file a 1099 form unless they provide medical or legal services.  If the IRS questions why you did not issue a 1099 to XYZ LLC (an LLC taxed as an S Corporation), the signed W-9 Form is your proof that the company certified to you that they were incorporated.

Due Dates and Penalties

1099s are due to the recipients and to the IRS by January 31st this year if you are reporting nonemployee compensation in box 7.  Penalties for failure to file 1099s vary but are anywhere from $50 to $260 per 1099.

More info…

Most companies are required to prepare 1099s…are you ready to do so?  The due dates for filing with the IRS have been pushed up this year so get ready now for filing those 1099s in January!  The information presented above is a summary of some important 1099 facts; however, should you need to see the detailed rules, click below to access the IRS Instructions – 2016 General Instructions for Certain Information Returns.

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Cloud-based Accounting Tools for Your Business

We’ve been working hard researching and implementing cloud-based accounting and financial tools to help our clients organize their data and cut down on data entry while increasing accuracy.  From an accounting perspective, our focus has centered on Xero (www.xero.com) and all of the ways Xero can help run your business more efficiently.  The beauty of Xero is its seamless integration with many other cloud-based accounting and financial solutions.  At PRM we’re using these solutions for accounts receivable, accounts payable, collections, vendor payments, and document retention all while cutting down on data entry time, streamlining our digital processes, and increasing efficiency and accuracy.  All of the solutions we’ve adopted can be accessed in the cloud via web browser, phone, or tablet.  These solutions really do make it easy to run your business wherever you are.

Bill.com (www.bill.com)

Bill.com is a great tool for digitally managing accounts receivable, accounts payable, collections, and vendor payments

  • Simply fax, scan or email your bills to bill.com. No more opening mail, handwriting approvals and G/L coding directly on the bill.  com’s automated system handles everything from approval to coding once the bill is received.
  • The entire A/P approval and payment process can be managed digitally. Paying vendors is also a breeze using bill.com’s ACH or “ePayments.”
  • Easily syncs w/Xero and QuickBooks further reducing data entry. Payments received and payments made using bill.com flow into your accounting software updating A/P and A/R seamlessly.

What bill.com customers are saying…

https://vimeo.com/111689100

https://player.vimeo.com/video/116381760?width=720&height=405&iframe=true

Hubdoc (www.hubdoc.com)

Hubdoc is a great storage tool for financial documents and receipts.

  • Hubdoc imports your financial documents and receipts in 3 easy ways:
    • Snap and send a picture of your receipt to your Hubdoc account using the Hubdoc app. We’ve been using this for all debit and credit card charges.  Once in Hubdoc we have the ability to sync w/Xero.  Data entry is easier (automated) AND the transaction will include a copy of your receipt.  What better way to defend yourself in an IRS audit than to have the transaction properly coded and have a receipt attached?
    • Link your financial accounts to Hudoc
      • We’ve linked our bank and credit cards to Hubdoc. Hubdoc automatically imports each month’s statement
    • Forward invoices from your inbox or have vendors send invoices to Hubdoc for you
      • Hubdoc recognizes your email address so you can easily import documents into your account via email. Simply send a vendor invoice from your email account and Hubdoc places the invoice in your account
      • Have vendors send their invoices to a specific email address provided by hubdoc. My vendors can send an email to marcusmire.hubdoc@app.hubdoc.com and those invoices will automatically import into my account

Quick Hubdoc video

https://www.youtube.com/watch?v=qH27ZChAfdg

Give these tools a try.  My bet is that you’ll be amazed at the ease of use, quick set up, and convenience.

I’d love to talk with you about these tools and how they can transform your business’ efficiency.

 

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New Due Dates for 2016 Tax Returns

 

Are you ready for the new due dates for 2016 tax returns due in 2017?  Recently enacted legislation has changed some due dates in order to facilitate a more logical flow of information, allowing taxpayers and preparers more ability to timely prepare and file returns.

Individual tax return (Form 1040) due date of April 15th and extended due date of October 15th did not change!  These dates are said to be “cut in stone”!  See below regarding FinCen Form 114, if applicable.

Partnership and LLC return (Form 1065) due dates have moved up a month…they are now due on March 15th.  If an extension is filed, the due date will be September 15th.

S Corporation return (Form 1120S) due dates remain the same…they are due on March 15th.  If an extension is filed, the due date will be September 15th.

Trust returns (Form 1041) original due date remains the same (April 15th); however, the extended due date is now September 30th.

Corporation return (Form 1120) due dates have been pushed back a month to April 15th for calendar-year returns. If an extension is filed, returns are due Sept. 15th until 2026, see note below.  For fiscal year companies, in most cases, returns will be due on the 15th day of the fourth month after the year-end.

Note:  Calendar­year C corporations can get extensions until Sept. 15 until tax years beginning after 2025, when the extended due date will be Oct. 15. June 30 fiscal­ year­end C corporations (returns due Sept. 15) can get extensions to April 15 until tax years beginning after 2025; after 2025, June 30 fiscal­year­end C corporations will have an Oct. 15 due date and can get extensions until April 15.

FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) due date has changed from June to April 15th.  An extension can be filed now to grant additional time (until October 15th).

State Returns –  Many states are likely to follow the above federal due date changes but may need to enact legislation in order to make those changes.  Louisiana has not made those changes yet…stay tuned.

Forms W-2 and 1099 Series – Acceleration of Due Dates for Filing Information returns

W-2 and 1099 Forms have generally been due to recipients by January 31st and due to the IRS/SSA by February 28th (or March 31 if filed electronically). For the 2016 Forms due in 2017, returns will be due to the IRS/SSA by January 31st, the same day they are due to the recipients.

Businesses should review accounting records now in order to verify that vendor information is complete and ready to file 1099 forms at the end of the year.

Why change the due dates now? 

If you are wondering why these changes have been implemented and how they will be helpful, continue reading below:  The partnership Form 1065 is now the first return due (March 15th).  All other entities and individuals can be partners in a partnership and may need information from Schedules K­1 from partnerships to complete their tax returns. For this reason, it is both logical and helpful to many that it be completed first.

Once partnership and S corporation returns have been filed by March 15, individuals, trusts, and C corporations will have the information (K-1s) they need from their pass-through entities to file timely returns. Trusts will have two more weeks after receiving extended partnership and S corporation Schedules K­1 to finalize their extended returns and issue their Form 1041 Schedules K­1 to beneficiaries, who will have an additional two weeks to complete their personal returns. Taxpayers with foreign accounts will have all the information needed to complete FinCEN Form 114 at the same time as the individual tax return due date and extension.

C corporation new due dates of April 15 (or the 15th day of the fourth month following the close of the tax year for most fiscal­year corporations).  Many C corporations previously needed to extend their returns because they were waiting on audited financial statements.  Audited financial statements are typically complete by the end of March. These corporations may no longer need to extend the income tax return.

It makes logical sense…only a tax season will tell whether the new dates truly make a difference in the hectic, fast-paced busy season!

For a quick-reference guide on the new due dates, click the link below to access the AICPA Federal Due Date Chart

http://www.aicpa.org/Advocacy/Tax/DownloadableDocuments/Federal-Due-Date-Chart-1-22-2016.pdf

 

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Accounting Made Simple, Smart and Secure with Xero Accounting

In today’s on the go, information at your fingertips world, being able to do business anywhere is essential.  That’s why I’ve become a Xero Certified Advisor.

Xero is a cloud-based accounting software that connects people with the right numbers anytime, anywhere, on any device, allowing you to focus on what you do best – running your business.  Here are a few key features of Xero and why I believe it’s a great solution for many small businesses:

Bank Feeds –  allows you to automatically import account transactions into Xero from your bank or other financial institution.  Once “bank feeds” are up and running, you’ll no longer need to download and import bank statements to get transactions into Xero.  No more gathering bank and credit card statements!

Real Time – use Xero to collaborate in real time with your accountant via Xero’s web-based access.  With “bank feeds” importing data daily, adjusting journal entries can be made as needed, and reports can be produced on a frequency (monthly, quarterly, etc.) that you choose.  No more swapping flash drives with backup data, waiting on adjusting entries from your accountant, or waiting until year-end to have a set of accurate financial statements.  Real-time data also leads to better decision making through timely analysis of financial information.

Mobile – Xero’s mobile app gives you freedom, with easy access to the essential tools for doing business on the move. With Xero mobile you can get paid faster by sending an invoice the minute you’ve finished a job, capture receipts on the go, and stay on top of your cash flow by reconciling bank transactions from wherever you happen to be.

I’d love to show you the features of Xero and how I can offer you a flat-rate monthly price based on your needs.  No guesswork as to the amount of your invoice each month.  If you’re interested in learning more about Xero and how it can help your business, give me a call or contact us here!

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