Accounting & Payroll Blog

Computer software can do everything a bookkeeper needs–except for bookkeeping.

An account’s normal balance is the side on which an increase is recorded. Some accounts have a normal debit balance; others, a normal credit balance.

As you know,

• asset accounts have a normal debit balance
• liability accounts have a normal credit balance
• owners’ equity accounts have a normal credit balance
• revenue accounts have a normal credit balance
• and expense accounts have a normal debit balance

That means if you spot an expense account on the trial balance with a credit balance or a liability with a debit balance, you want to examine it before you actually do your trial balance and make the adjustments But what about the normal balance of contra accounts? A contra account is directly related to a specific asset, liability or stockholders’ (owners’) equity, revenue or expense account–but has the opposite normal balance of its related account.

Here are some examples:

· Asset contra accounts. Accounts Receivable has a debit balance; its contra account, Allowance for Doubtful Accounts, has a credit balance.
Equipment has a debit balance; its contra account, Accumulated Depreciation–Equipment, has a credit balance.

· Liability contra accounts. Bonds Payable has a credit balance; its contra account, Discount on Bonds Payable, has a debit balance. · Owners’ equity contra accounts. Most owners’ equity accounts have a normal credit balance, but Treasury Stock has a debit balance and is treated as a contra account to total Owners’ Equity (rather than to a particular account). Dividends Declared has a debit balance and is a contra account to Retained Earnings.

· Revenue contra accounts. Sales has a credit balance; its contra accounts, Sales Discounts and Sales Returns and Allowances, have debit balances. · Expense contra accounts. Purchases has a debit balance; its contra accounts, Purchase Discounts and Purchase Returns and Allowances, have credit balances.

When Correct Account Balances May Not Be Normal Generally, an account balance that is not normal is incorrect, but there are exceptions. For example, if a company overdraws its bank account, the Cash account (normal debit balance) will have a temporary credit balance. Similarly, if bills are overpaid, Accounts Payable (normal credit balance) may have a temporary debit balance. If a company is operating at a loss, Retained Earnings (credit balance) may have a debit balance. Eying the Trial Balance When reviewing the trial balance for errors, the first step is to eye the accounts to see that each account’s balance is in the proper debit or credit column. Source: AIPB

Can you help with paying independent sales representatives by direct deposit, keep track fro 1099 and do IRS filings for independent contractors (1099) each year?

Yes, we can do it. Each time you want to pay sales rep you will login to website, write amount and choose either check or direct deposit. We will do all 1099 filings with IRS and provide copies to your reps at the end of the year. It can be set up that transactions will be imported to your QuickBooks. Pricing is the same as for employees payroll. We can do regular payroll too.

One major difference is that hourly employees are entitled to overtime pay of at least 1.5 x their hourly rate for each hour worked over 40 hours in the workweek–but only some salaried employees are entitled to overtime pay.

    The term “salary” generally refers to a fixed or guaranteed amount per week or other payroll period, such as biweekly, semimonthly or monthly. Contrary to popular belief, being paid a salary does not automatically exempt a worker from overtime pay. Exemption depends on whether the employee’s work meets one of the exempt categories under federal/state wage-hour law.

Another  good tip from The American Institute of Professional Bookkeepers 

Here is the answer to email I received this morning.

Our Norwegian Company has just started up a business in Nevada. We are going to run the business from Norway in the beginning, so we need someone to send out invoices for us till two of our employees moves over to the US. So, basically, we just need a person to print and send our invoices. As we grow and our employees moves over, we will need regular accountant and payroll services as well. What will this cost (the invoicing only – if you do stuff like that)?

Let me give you first my suggestion. Invoices can be sent by email/fax in the USA. There is no requirement to send hard copy like in many countries in Europe.

The most used program for accounting is QuickBooks. QuickBooks will email invoices for you. They have several versions. I like the Online Edition the best. You can login to QuickBooks Onine through Internet Explorer. Issue invoices, email them to customers. You can also give access to accountant in the USA to do adjustments. It is very easy for people working in remote locations.

Thanks to aipb.org here is useful information about company car writeoffs.

A sole proprietorship–an unincorporated company with one owner–can depreciate a vehicle as though it were used 100% for business even when employees drive company vehicles for personal use under the same conditions, provided that:

1.      the employer has a business reason for providing the vehicle, such as for business travel or as part of the employee’s compensation as a perk for the job; and

2.      the employer reports the value of the employee’s personal use as taxable income on the employee’s W-2.

    But when the sole proprietor drives the car for personal use, there are different rules.

    Sole proprietors do not file a W-2 for themselves, so their personal use of their own car is not taxable income. However, they are allowed to depreciate the vehicle only in proportion to their business usage. For example, a sole proprietor who drives his or her own vehicle 68% for business can depreciate only 68% of the vehicle’s cost basis for tax purposes.

Example 1: Sole proprietor Rosa has a pickup and a car. She lets employee Jane use the pickup for business, and Rosa uses the car. Mileage records show that Rosa and Jane both drove the vehicles 80% for business and 20% for personal use.

·          If Rosa’s company reports the value of Jane’s 20% personal use of the pickup as taxable income on Jane’s W-2, 100% of the pickup’s cost basis can be depreciated.

·          Rosa does not report her 20% personal use of her own car as taxable income. Instead, she must limit her depreciation of the vehicle to 80% of the cost basis (because she used the car 80% for business). Example: If Rosa’s car has a cost basis of $20,000, she can depreciate only $16,000 ($20,000 cost basis x 80% business use). Her deduction of other vehicle costs (gas, repairs, oil, etc.) is also limited to 80%–the business use portion.

    When a sole proprietor drives the car for both personal and business use, the IRS auto limit is also reduced by the personal use.

Example 2: In 2006, sole proprietor Rosa purchases a car for $24,000. Mileage records indicate that Rosa drives her car 75% for business use and 25% for personal use. Rosa’s cost basis is $18,000 ($24,000 original cost basis x 75% business use). What is Rosa’s maximum depreciation deduction for the auto on her 2006 tax return?

To compute: $18,000 cost basis x 20% Table 1 rate for Year 1 = $3,600 Year 1 depreciation. However, Rosa’s maximum deduction, based on the IRS limit for a car purchased in 2006, is $2,220 ($2,960 x 75% business use). Rosa’s maximum depreciation deduction for the auto on her 2006 tax return is $2,220.

    The depreciation schedule for a sole proprietor passenger auto driven partly for personal use is complicated; a CPA should be consulted.

    Sole proprietors who use the company car do not have to include the value of their own personal use in their taxable income, but they must limit depreciation to the portion of the cost basis proportional to the business use of the vehicle. However, if a sole proprietor’s employees drive the company car, their personal use is reported as personal income on their W-2, and the sole proprietor depreciates the full cost basis of the auto.

If you are an online auction seller, you may have tax responsibilities. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your sales may result in capital gains, nondeductible personal losses, or you may have ordinary business income. Read more in IRS website.

The Internal Revenue Service reminds taxpayers that there are specific guidelines to be followed when deducting travel, entertainment and gift expenses.

In general, taxpayers may deduct ordinary and necessary business-related expenses for traveling away from home, entertaining clients and customers and giving gifts to customers, employees and others with whom they have a business association. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business.

Taxpayers who deduct these expenses must exclude personal expenses when computing their deductions and must have documentation for the expense, including statement of the business purpose, names of the persons being entertained, date and location. In addition, generally only 50 percent of business meal and entertainment expenses can be deducted.

 Read more info on IRS website.

I found an interesting report detailing the importance and relevance of Business Ethics in Accounting. Enjoy!

http://acct.tamu.edu/smith/ethics/ethics.htm

There are many different kinds of business income, and almost all of them are taxable. From the Nolo Small Business Center Just as the IRS taxes individuals’ income, such as income from a job, it also taxes the income a business brings in. And, in the same way that an individual can lower her taxable income through credits and deductions, so can a small business.
Before getting into business deductions, let’s make sure we all understand what the tax code means by the term “income.” With a few exclusions discussed below, the tax law doesn’t care whether you get it from your business, from wages paid by someone else’s business or from an investment: it is taxable to you as an individual. Actually, the better question for small business tax understanding is, “What is gross income?” The tax code (IRC § 61) talks in terms of gross income, so we will, too. It reads: “Except as otherwise provided ? gross income means all income from whatever source derived.” You can’t get much broader than that, can you? Goods and services. Income, for tax purposes, doesn’t mean just cash; it can take many forms. Goods, property or services received have all been held to be within the definition of income.

If you barter (exchange goods or services for the same), the fair market value of the item or service you received should be included in your tax reported income. Of course a lot of bartering goes on, and the IRS isn’t any the wiser, but getting away with it doesn’t make it right. Anything of value your business (or you individually) receives is income, unless it specifically falls within the exclusions discussed below.

Constructive income. Income also means anything you have the right to put your hands on but don’t for some reason. The legal doctrine of “constructive receipt” says that as soon as money or property is available to you, or is credited to your account, it becomes income — whether you grab it or not. For instance, you can’t get a check for services in November 2000 and hold it for deposit until 2001 without being taxed on it in 2000, the year received. Illegal income. Note that IRC § 61 is morally neutral; it doesn’t distinguish between illegal and legal income. If you earn a living as a hit man for the mob, you still are earning income as far as the IRS is concerned, and had better declare it on your tax return. Al Capone wasn’t sent to prison for murder, bootlegging or racketeering; he was convicted of tax evasion for not reporting the fruits of his labors to the IRS. Worldwide income.

Americans are taxed on their worldwide income; no matter where earned it is still income taxable in the U.S. There is one exception: if you earn it and reside outside the United States for most of the year, some or all of your foreign income may be excludable. See IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. What isn’t income: exclusions. Some kinds of income fall into the “except as otherwise provided” exception of IRC § 61. For instance, the tax code specifically excludes gifts and inheritances from taxable income.

There is no dollar limitation on how much you can get by these means without tax to you. (Sorry, the $10 million that is being dropped off by the Prize Patrol from Publisher’s Clearinghouse is not legally a gift and is taxable.) Thankfully, many so-called fringe benefits provided by businesses to owners and employees are specifically excluded from income. Most of the statutory exclusions from income granted by Congress are found in IRC § § 101 to 150. Return of capital. Of great importance to owners and investors in businesses is that the return of a capital investment is not taxable income. In other words, to the extent that you sell a business or an asset and get back your money exchanged for the asset, you haven’t earned any taxable income.

Only the profit, if any, is taxed. Example Toni invests $1,000 in the stock of Ronaldo’s Rubber Fashions, a small business corporation, and later sells her stock for $1,500. Only $500 is considered income for tax purposes; the other $1,000 is a return of capital to Toni. Tax-free withdrawals. If you borrow against an asset, whether it belongs to your business or to you personally, the loan proceeds are not income. This is a valuable tool for taking money tax-free out of an unincorporated business that holds an appreciated asset, such as real estate.

I ran across this article at AllBusiness.com and thought it was interesting. It highlights some of the top bookkeeping mistakes made by Small Businesses.

From one-person entities to major corporations, bookkeeping is a significant part of any business endeavor. While it is typically not one of the more glamorous jobs, bookkeeping is at the heart of a company’s success, and errors can cost the company significantly. Below are 10 of the most common errors that you want to avoid.

1. Not saving receipts of less than $75. While such receipts may not be required by the IRS, they provide backup documentation for the many deductions you may claim. It is very simple to have a folder for such receipts, which can prove valuable at tax time.

2. Doing it yourself. No matter how much they hate it, many small business owners insist upon handling the books themselves. Having a competent bookkeeper coming in to handle the books can be extremely beneficial in that they have the skills to do the job quickly and efficiently and will provide a second pair of eyes to find errors and make suggestions.

3. Forgetting to track reimbursable expenses. Small business owners often pay for expenses out of pocket or with their own personal credit card then make the mistakes of failing to track these expenses. They then fail to submit the expenses to the company for reimbursement.

4. Not properly classifying employees. The proliferation of independent contractors, consultants, and freelancers has made it difficult to determine who is on staff and who is not. This results in misfiling when it comes to filing taxes since there are different rules and regulations for employees and non-employees.

5. Lack of communication. Having someone handling bookkeeping is only effective if they are filled in and kept up to date on all financial transactions. A frequent mistake is paying someone a bonus and not reporting it or buying supplies and not providing the bookkeeper with the information or receipts.

6. Not reconciling the books with the bank statement each month. One of the fundamental aspects of bookkeeping is reconciling the books and bank statements every month. Nonetheless, there are businesses that do not do this and others where errors are made by not doing it properly. Again, this is a good reason for hiring an experienced bookkeeper.

7. No backup. The paperless office does not exist in the real world, where audits do still exist. A paper trail, documentation or verification in the form of backup documents should be available, especially if all files are on the computer system, which could be prone to technical problems.

8. Not deducting sales tax. A common mistake in retail businesses is not deducting the sales tax from the total sales. This results in a higher total sales amount and does not lower the amount of taxes due.

9. Petty cash nonchalance. A system should be set up whereby a set amount of money is in petty cash and each time money is taken out for any purpose, a petty cash slip is filled out. When the fund is exhausted, the slips will total the original amount and a check can be written to cash to set up the full amount again. Many offices are nonchalant about using the petty cash fund without keeping accurate records.

10. Miscategorization or overcategorization. There are fairly standard categories for expenses. However, often expenses are entered into the wrong categories or too many categories are created. Use general bookkeeping guidelines for standard categorization and create as few new categories as possible. Try to follow generally accepted accounting practices.