How to Record Equipment Purchases in Quickbooks

If you’ve recently purchased equipment for your business, you might be wondering how to record it in Quickbooks. Assuming your business needs the equipment to perform its revenue-generating operations, you can write it off on your taxes. There’s no option specifically for “equipment” in Quickbooks, however, leaving many business owners to believe that it’s not possible to record such transactions. While Quickbooks doesn’t have an option for equipment, you can still record the transaction.

Equipment Is a Fixed Asset

In Quickbooks, equipment is typically recorded as a fixed asset. Fixed assets, of course, are long-term resources that you don’t intend to consume or sell within the fiscal period in which you purchased it. As a result, most types of equipment are considered fixed assets. You may keep a piece of equipment for several years, all while using it to facilitate your business’s money-making activities. Because equipment is typically a fixed asset, that’s how you’ll need to record it in Quickbooks.

Steps to Recording Equipment Purchases in Quickbooks

You can record equipment purchases in Quickbooks by labeling them as fixed assets. After logging in to your Quickbooks account, click the gear icon on the home screen, followed by “Chart of Accounts” below your company’s name. Next, click “New” in the upper-right corner. You can then choose the option for “Fixed Asset” under the menu for account type.

Assuming you’ve followed these steps, you should now be able to enter the details about the equipment purchase, including the type and original cost. You’ll also be able to create a unique name for the fixed asseet account.

Keep in mind that Quickbooks supports depreciation tracking of fixed assets. If you click the box labeled “Track depreciation of this asset,” Quickbooks will add a subaccount for depreciation. Once created, you can track the equipment’s depreciation over time. Of course, depreciation tracking is optional, meaning you aren’t required to use it. Nonetheless, many business owners and accountants use this feature to track how much their equipment has depreciated in value.

After completing all the required fields, as well as setting up depreciation tracking, you can complete the process by clicking “Save and close.” Congratulations, you’ve just recorded the equipment purchase. You’ll now be able to view the transaction by looking at your business’s fixed asset purchases in Quickbooks.

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5 Tips on How to Go Paperless in Your Office

How much paper do you typically use in your office? Research shows that office workers in the United States use an average of 10,000 sheets of paper annually. Some workers, of course, use far more paper. If your office is cluttered with paper, though, you should consider the following tips on how to go paperless. By making just a few small changes to your workspace and daily work activities, you can reduce or potentially even eliminate the need for paper.

#1) Take Notes on Your Smartphone

Many office workers create notes on printer paper or sticky notes. A better idea, however, is to use your smartphone for note-taking. Whether you own an Android- or Apple-powered smartphone, you can download a note-taking app. Note-taking apps live up to their namesake by allowing you to take notes on your smartphone.

#2) Use a Whiteboard

In addition to your smartphone, you can use a whiteboard to create notes and other temporary messages. A whiteboard, of course, is a dry-erase board that supports the creation of temporary messages. After writing a message on a whiteboard, you can erase it with a dry cloth.

#3) Scan Documents

To truly go paperless in your office, you’ll need to invest in a scanner. Using a scanner, you can create digital copies of paper documents. Rather than keeping large file cabinets full of paper documents, you can convert those documents into digital files. Known as digitizing, it’s become increasingly popular among office-based businesses.

#4) Use Credit or Debit Cards for Business Purchases

When purchasing products or services associated with your business’s operates, use either a credit or debit card. Why is this important? If you pay for a product or service using cash, you’ll only have a paper receipt. Using a credit or debit card, on the other hand, creates a digital trail. The vendor may still give you a receipt, but you’ll also be able to access your financial records digitally to view the transaction information.

#5) Recycle

You may not be able to eliminate all the paper in your office. Nonetheless, following these tips can help you go paperless by significantly reducing the amount of paper your office uses. And you can always recycle any remaining paper in your office — assuming you don’t need it. Even if it has ink on it, most types of printer paper is recyclable.

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5 Accounting Tips for Independent Contractors

Do you work as an independent contractor? You aren’t alone. According to the U.S. Bureau of Labor Statistics (BLS), over 16 million Americans are classified as independent contractors. They are technically still business owners; they just don’t own or work for an incorporated business, such as a limited liability company (LLC) or a corporation. While working as an independent contractor has its perks, you’ll need to keep detailed and transparent records of your business’s financial transactions. Here are five essential accounting tips for independent contractors.

#1) Separate Personal and Business Expenses

The golden rule of accounting is to separate personal and business expenses — a rule that applies to all business entities, including independent contractors. If you only have a single checking account, which you use for personal expenses, open a second checking account so that you can use it for your business’s expenses. With an account for your personal expenses and another account for your business’s expenses, you won’t accidentally or otherwise mix these two expenses.

#2) Use Digital Payments Methods When Possible

When given the option between paying for a business-related expense with cash or a digital method, choose the latter. If you use cash to buy a product or service needed to execute your business’s operations, you won’t have a digital record of it. At best, you’ll have a paper receipt, which are undoubtedly easy to lose. Paying with a credit card or debit card, on the other hand, will create a digital record of the transaction.

#3) Consider Getting an EIN

Independent contractors are distinguished from other business entities because they can operate under their respective Social Security number. With that said, you can still use an Employer Identification Number (EIN). Using an EIN is beneficial as an independent contractor because it protects your Social Security number from unnecessary exposure. Rather than providing your Social Security number to a business, you can give the business your EIN.

#4) Make Quarterly Tax Payments

As an independent contractor, you’ll be responsible for making quarterly tax payments to the Internal Revenue Service (IRS). This involves estimating your business’s income for the following year, after which you can calculate your projected taxes while breaking them into four equal payments. Failure to make quarterly tax payments will result in a penalty.

#5) Use Quickbooks Self-Employed

Quickbooks offers accounting software that’s designed specifically for independent contractors. Known as Quickbooks Self-Employed, it’s a smart investment that can help you keep better financial records. Among other things, Quickbooks Self-Employed will separate your personal and business expenses, ensure maximum deductions and even allow you to prepare estimated quarterly tax payments.

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Beware: 5 Things That Can Hurt Your Business’s Cash Flow

What does your business’s cash flow typically look like? Defined as the net amount of available cash your business has at the end of an accounting period, it’s an important metric that reflects your business’s financial health. While your business’s cash flow will likely fluctuate from month to month, you should beware of the five following things that can hurt its cash flow.

#1) Unpaid Customer Invoices

Not all of your business’s customers will pay their invoices immediately upon reception. Some customers may wait a few days to pay their invoices, whereas others may wait or weeks or even months. The longer it takes a customer to pay his or her invoice, though, the greater the risk of it hurting your business’s cash flow.

#2) Excess Inventory

If your business sells physical products — as opposed to virtual products or services — you should beware of excess inventory. Like unpaid customer invoices, excess inventory can hurt your business’s cash flow. You’ll have to spend money to restock your business’s inventory, resulting in less available cash on hand. Assuming you don’t sell the newly stocked inventory in the same account period during which you purchased it, it will bring down your business’s cash flow.

#3) Interest on Debt

Something else that can hurt your business’s cash flow is interest on debt. Although there are exceptions, most lenders require borrowers to pay interest on debt. If you take out a loan to cover some of your business’s short- or long-term expenses, for example, you’ll have to pay interest on it. Interest payments such as this will lower your business’s cash flow.

#4) High Overhead

You’ll probably encounter overhead expenses when running a business. Overhead, of course, includes all expenses that aren’t directly related to your business’s operations. Common examples include utilities, rent, insurance, office supplies and payroll.

#5) Lack of Sales

Of course, a lack of sales can hurt your business’s cash flow as well. If your business sells few or no products or services during a given accounting period, its cash flow will suffer during that same account period. All businesses experience ups and downs in regard to sales — it’s just something that comes with the territory of operating a commercial business. If your business’s sales remain stagnent for a prolonged length of time, though, it may hurt your business’s cash flow.

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A Beginner’s Guide to the First In, First Out (FIFO) Accounting Method

Have you heard of the first in, first out (FIFO) accounting method? It’s used by countless businesses to track their respective inventory. With the FIFO method, businesses assume their oldest products have been sold first. Businesses can then include these assets in their respective cost of goods sold (COGS). All other assets will be valued according to this information. While the FIFO accounting method may sound complex, however, it works in a relatively simple way.

Overview of FIFO

FIFO is an accounting method that’s designed to help businesses assume their cash flow. Businesses, of course, must spend money to move inventory. It costs money to produce, market, sell and distribute products. Under the FIFO accounting method,  a business will assume that its oldest products have been sold first. With this information in hand, the business can calculate its COGS. COGS is calculated using the FIFO accounting method by taking the cost of a business’s oldest product and multiplying it by the number of units of solds.

A business may not necessarily sell its oldest products first. It may sell newer units of a specific product before the older units. Regardless, the FIFO accounting method works on the assumption that oldest products are sold first. Any remaining and unsold units of a product are then considered new.

FIFO vs LIFO: What’s the Difference?

There’s also the last in, first out (LIFO) account method. As you may have guessed, the LIFO accounting method contrasts with the FIFO method by assuming a business’s newest products are sold first.

FIFO is an older and more common accounting method. It wasn’t until the 1970s when it picked up momentum as a way for businesses to reduce their income taxes. The Internal Revenue Service (IRS), however, has since adjusted its code to prevent businesses from monetary benefiting from the use of the LIFO accounting method.

In Conclusion

To recap, FIFO is an accounting method that involves cash flow assumptions based on the sale of a business’s oldest products first. Businesses typically don’t move all their inventory overnight. It can take months or years for a business to sell its products. Even then, it may not sell all of its products. Under the FIFO accounting method, a business will assume its oldest products are first.

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What Is a Subsidiary Account?

For healthy financial records, you’ll need to track all of your business’s accounts. There are different ways to categorize accounts, however, one of which involves the use of subsidiary accounts. Found below a control account, they contain the information that’s reported in a general ledger account. To learn more about subsidiary accounts and how they are used in accounting, keep reading.

The Basics of Subsidiary Accounts

A subsidiary account is a type of financial account — income, expenses, etc. — that’s designed to categorize and track different types of transactions. They are designed to reflect the general ledger account to which they are added. For example, you may have a general ledger account for “Shipping Expenses,” to which you can add related subsidiary accounts like “bubble wrap,” “postage,” “shipping insurance,” etc.

The total amount of all the related subsidiary accounts must equal that of the general ledger account to which they are added. If the “Shipping Expenses” account is $15,000, the subsidiary accounts should add up to $15,000 as well.

Subsidiary vs Control Accounts: What’s the Difference?

Subsidiary accounts work in control with control accounts. A control account is simply a general ledger account to which one or more subsidiary accounts are added. In the aforementioned example, the control account is “Shipping”, whereas all other accounts are subsidiary accounts.

To create and use subsidiary accounts, you must determine which control account is most relevant to them. You can think of subsidiary accounts as subfolders, with control accounts being a parent folder. Therefore, the subsidiary accounts must be placed under a control account. Of course, you can’t place the same subsidiary account under two or more control accounts. Rather, each subsidiary account must be linked to more than one control account.

The Benefits of Using Subsidiary Accounts

Using subsidiary accounts can make it easier to track your business’s accounts on a more detailed level. With them, you’ll be able to break down your business’s income and expense accounts.

Subsidiary accounts also allow you to verify the total amount of your business’s control accounts. When you add subsidiary accounts to a control account, the total amounts must be equal. In other words, all of the subsidiary accounts added to a control account should add up to the same amount as the control account. If not, it indicates an accounting error, in which case you can go back to find and fix the discrepancy.

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What Is a Variance in Business Accounting?

For a better understanding of how much your business actually spends on a planned expense, you’ll need to assess its variance. Regardless of niche or industry, all businesses have expenses; it’s something that comes with the territory of operating a business. Unfortunately, it’s difficult to predict exactly how much an expense will cost, which is where variances come into play.

The Basics of a Variance

The term “variance” refers to the cost difference between a budgeted or planned expense and the actual amount for which your business pays. For each planned expense, you’ll have a variance – assuming you follow through with the expense by purchasing it. Variance simply denotes the difference between the expense’s expected cost and its actual cost.

Businesses typically budget money for specific types of products or services before purchasing. A manufacturing company, for example, may budget $3,000 per month for raw materials. Of course, the manufacturing company may spend more or less than this planned amount when purchasing the raw materials. By conducting a variance analysis, the manufacturing company can see the cost difference between the budgeted amount and actual cost of the raw materials.

Using this same example, if a manufacturing company budgeted $3,000 for raw materials but spent $2,700 on them, the variance of that expense would be $300. Variances can be analyzed for all types of business-related expenses. It just involves analyzing the difference between the budget amount and actual cost of an expense.

Favorable vs Unfavorable Variances

Variances can be classified as either favorable or unfavorable. What’s the difference between them exactly? A favorable variance means there’s a positive price difference, whereas an unfavorable variance means there’s a negative price difference.

You should obviously strive for favorable variances. With a positive price difference, favorable variances signal that your business made more money than what you had expected to. If you think an expense will cost more than what it actually does, your business’s total expenses will decrease. In turn, your business will make more money in the period in which the expense was realized.

In Conclusion

It’s impossible to predict how much money your business will spend on planned expenses. An expense may end up costing more or it may end up costing less. Regardless, you can gain insight into the difference between these amounts by conducting a variance analysis. If an expense has a positive difference, it’s considered a favorable variance. If an expense has a negative difference, it’s considered an unfavorable variance.

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The 5 Parts of a General Ledger and What They Mean

Consisting of detailed information about your business’s financial transactions, a general ledger is an essential document used in accounting. In your business’s general ledger, you’ll see a snapshot of all its financial transactions. There are five main parts of a general ledger, however, each of which denotes a specific type of financial activity. For a better understanding of these parts and what they mean, keep reading.

#1) Liabilities

You’ll find your business’s liabilities recorded on its general ledger. A liability, of course, is money your business owes to another person or business. If your business received financing through a bank-issued loan, the loan will be recorded as a liability. Other common types of liabilities found on a general ledger include credit card debt, lines of credit and payroll.

#2) Assets

Assets are another part of a general ledger. An asset is something of value that your business owns. Keep it mind that assets can be tangible or intangible. Tangible assets include cash, real estate and product inventory, whereas intangible assets include patents and other forms of intellectual property. Both types of assets are recorded on your business’s general ledger.

#3) Expenses

All general ledgers feature expenses as well. Expenses are defined as costs associated with your business’s operations. Whether you run a small local business or a global Fortune 500 enterprise, you’ll probably have to buy products or services to perform your business’s operations. Any product or service that you purchase to facilitate your business’s operations is considered an expense. And like liabilities and assets, expenses are recorded on your business’s general ledger.

#4) Revenue

You’ll also find your business’s revenue recorded on its general ledger. Revenue refers to income earned by your business through its normal operations. When your business sells its products or services, it will earn revenue. Any income that’s earned through your business’s normal operations is considered revenue, and it’s recorded on your business’s general ledger.

#5) Owners’ Equity

Finally, owners’ equity is a part of a general ledger that reflects the difference in value between your business’s assets and its liabilities. You should strive to achieve a higher amount for your business’s assets than its liabilities. If your business’s liabilities outweigh its assets, it indicates your business isn’t profitable. You can find owners’ equity recorded on your business’s general ledger.

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What Are Capital Gains in Accounting?

Capital gains are often misunderstood by business owners. It’s not until a business owner is hit with a penalty from the Internal Revenue Service (IRS) when he or she realizes the importance of recording them. Whether you run a small or large business, you should familiarize yourself with capital gains and how they are used in accounting.

The Basics of Capital Gains

The term “capital gains” refers to the profits that are generated through the sale of an asset. If you sell an asset at a higher price than the amount for which you purchased it, you’ll incur capital gains. The difference between the asset’s original purchase price and its resell price is its capital gains. A real estate flipping business, for instance, may purchase a house for $75,000, after which it sells the house for $125,000. The capital gains on this real estate transaction would be $50,000.

Conversely, the term “capital losses” refers to the financial losses incurred through the sale of an asset. In a perfect world, every asset you sell would turn a profit. Unfortunately, this doesn’t always happen. You may even up selling an asset at a lower price than that for which you paid it. In instances where you incur financial losses such as this, it’s considered capital losses.

While capital taxes are taxable, you can minimize this financial burden by holding on to your assets for at least one year before selling them. When you hold an asset for at least a year, it’s considered a long-term capital gain — once the asset is sold — which is taxed by the IRS at a lower rate than short-term gains.

Capital Gains vs Dividends: What’s the Difference?

Although they share some similarities, capital gains aren’t the same as dividends. Dividends are simply assets that are distributed to a company’s shareholders. In accounting, dividends are recorded as income for the year in which they were distributed. Capital gains, on the other hand, are simply the profits generated through the sale of an asset.

How to Track Capital Gains in Quickbooks

Assuming you use Quickbooks, you might be wondering how to track your business’s capital gains. One way to track capital gains in Quickbooks is to create a separate account for them. You can create an income account, for instance, called “capital gains on [enter asset name]” Assuming you sell the respective asset for more than its original purchase price, you can then record the difference in the newly created income account.

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Balance Sheet vs Income Statement: What’s the Difference?

Many business owners assume that balance sheets and income statements are the same. While they are both used in financial accounting, though, they are each designed for a specific purpose. As a result, balance sheets and income statements aren’t interchangeable. By familiarizing yourself with the differences between balance sheets and income statements, you’ll know exactly when and how to use them.

What Is an Income Statement?

Also known as a profit-and-loss statement, an income statement is a financial document that shows your business’s revenue and expenses over a predefined period, such as a fiscal quarter or year. It’s essentially an overview of your business’s profits and losses.

Income statements are often used to secure loans, credit and other forms of financing. If you’re trying to secure financing for your business, the lender or creditor may ask for an income statement. Reviewing the income statement allows the lender or credit to gain a better understanding of your business’s ability to satisfy the debt. If your business shows substantial profits with little or no losses, the lender or credit will feel more confident knowing that your business has the financial ability to repay the debt.

It’s important to note that income statements are zeroed out at the end of their respective period. Once you’ve wrapped up the period for an income statement, you must zero out the balances of the accounts.

What Is a Balance Sheet?

A balance sheet, on the other hand, is a more thorough financial document that shows your business’s assets and liabilities as well as the equity of its shareholders.

When creating balance sheets, you should strive to match your business’s assets with the liabilities and equity of your business’s shareholders. In other words, the total amount of your business’s assets, as recorded on the balance sheet, should match equal the combination of your business’s total liabilities and the equity of its shareholders.

Balance sheets are far more detained than income statements. While income statements are somewhat limited in scope, balance sheets contain detailed information. More specifically, they contain every asset and liability recorded by your business for a given period, such as a fiscal quarter or year. Hopefully, this gives you a better understanding of the differences between income statements and balance sheets in financial accounting.

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