Accounting

Are you running late on your taxes? While tax laws in the United States change from year to year, the Internal Revenue Service (IRS) typically requires Americans to file their taxes by April 15. Some taxes, however, are more complex than others. Even if you’re unable to prepare and file your taxes by the due date, however, you can file an extension.

The Basics of a Tax Extension

A tax extension is exactly what it sounds like: an extension of your taxes. It extends the due date of your taxes. By filing a tax extension, you’ll have more time to prepare and file your taxes.

How a Tax Extension Works

There are a few different ways that you can file a tax extension. The IRS offers a Free File tool for tax extensions. Regardless of your income, you can use this online tool to extend the due date of your taxes. Alternatively, you can file a tax extension when paying some or all of your estimated income tax. There’s an option to file a tax extension when submitting estimated tax payments using Direct Pay, EFTPS or a credit or debit card.

Whether you use the Free File tool or the estimated payments option, you’ll have an extra six months to prepare and file your taxes after filing an extension. As previously mentioned, April 15 is typically the date on which taxes are due. A tax extension will extend the due date of your taxes to October 15.

What’s the Penalty for Filing a Tax Extension?

There’s no penalty for filing a tax extension. With that said, you’ll still have to pay all of your taxes by the normal due date, which is typically April 15.

A tax extension only extends the date by which your taxes must be filed; it doesn’t extend the date on which your tax liabilities must be paid and satisfied. If you owe money with your taxes, you must pay the IRS by the normal due date of April 15, regardless of whether you file an extension.

You should still consider filing a tax extension if you’re unable to submit your taxes by the normal due date. With a tax extension, you won’t be slapped with a late filing penalty. If you owe any money, though, you’ll need to pay the IRS by the normal due date. A tax extension works by pushing back the date by which your taxes must be filed. Contrary to common belief, it doesn’t extend the due date of tax payments.

Have anything else that you’d like to add? Let us know in the comments section below!

Does your business have an audit trail? Businesses of all shapes and sizes can benefit from an audit trail. You can use it to cut unnecessary expenses, improve cash flow and prepare your business’s taxes. What is an audit trail exactly, and how does it work?

Overview of Audit Trails

An audit trail is a chronological record of a business’s financial transactions, including receipts, sales invoices, bank statements and other documents. It’s designed to track the flow of money from the source to the financial statements. When viewing an audit trail, you’ll see your business’s financial transactions as well as supporting information about those transactions.

How Audit Trails Work

Audit trails work by providing information about financial transactions. There are different types of audit trails, some of which contain more information about financial transactions than others. A complete audit trail, for instance, may contain the time of the transaction, the parties involved (e.g. your business and a vendor or customer), the location and the amount. Other audit trails are simpler and contain less information. Regardless, all audit trails contain information about financial transactions.

Audit trails are designed to record the sequence of events in the financial transaction process. When your business receives an invoice from a supplier, for instance, the invoice is recorded in the accounts payable ledger, along with the date, amount and other relevant details.

The Importance of an Audit Trail

Some business owners assume an audit trail isn’t necessary. They believe it’s a waste of time, so they focus their time and energy elsewhere. But the truth is that all businesses can benefit from an audit trail.

An audit trail ensures the accuracy and integrity of financial information. By featuring financial transactions and supporting information, it shows that the financial transactions were properly recorded and authorized. An audit trail also allows auditors to verify the completeness of financial statements and detect any errors, fraud or irregularities.

Many businesses use audit trails internally. With an audit trail, you can go back and review all of your business’s financial transactions to ensure they are correct. Some financial transactions may contain discrepancies. It only takes a single discrepancy to throw off your entire business’s books. An audit trail can help you can find and fix discrepancies so that your business has cleaner books.

Did this tutorial work for you? Let us know in the comments section below!

Is your business’s balance sheet showing a negative cash balance? Of all the different accounting documents, balance sheets are among the most important. While some businesses show a positive cash balance on their balance sheet, though, others show a negative cash balance. What does a negative cash balance mean exactly?

The Basics of a Balance Sheet

To better understand what a negative cash balance means, you must familiarize yourself with the basics of a balance sheet. A balance sheet is a financial document that summarizes the financial balances of a business (or a person). It features three primary components: assets, liabilities and shareholders’ equity.

You can refer to a balance sheet to gain a better understanding of your business’s financial health during a particular period. Maybe you want to measure your business’s financial health for the previous quarter, or perhaps you want to measure your business’s financial health for last year or even five years ago. Regardless, you can generate a balance sheet for that period. The balance sheet will summarize your business’s assets, liabilities and shareholders’ equity for the specified period.

Writing Checks

One of the most common causes of a negative cash balance on balance sheets involves writing checks. If you write a check and your business doesn’t have sufficient funds in its checking account to cover it, you may end up with a negative balance.

Millions of businesses still write checks to pay for the goods and services needed to carry out their operations. When writing checks, though, you should check to ensure that you have the appropriate funds to cover them. If there are insufficient funds in your business’s checking account, you may end up with a negative balance on your business’s balance sheet.

Another instance in which writing checks may lead to a negative cash balance is if you rewrite a check but fail to void the original check. A supplier, for instance, may not receive the original check that you send them, in which case the supplier may request a new check. You’ll need to void the original check so that it doesn’t throw off your business’s balance sheet. If you forget to void the original check, you may end up with a negative cash balance on your business’s balance sheet.

Have anything else that you’d like to add? Let us know in the comments section below!

Income statements and cash flow statements are two common types of financial documents. You can use them to gain a better understanding of your business’s finances. While income statements and cash flow statements consist of similar information, though, they aren’t the same. What’s the difference between income statements and cash flow statements exactly?

What Is an Income Statement?

An income statement is a financial document that summarizes a business’s revenues and expenses over a specific period of time — typically a month or a year. The purpose of an income statement is to show a company’s profitability for a specific period of time by revealing how much money it generated and how much money it spend during that period.

What Is a Cash Flow Statement?

Also known as a statement of cash flows, a cash flow statement is a financial document that shows the inflow and outflow of money over a specific period of time. Like with income statements, cash flow statements typically cover periods of one month or one year. The purpose of a cash flow statement is to provide insight into a business’s ability to generate and manage its cash.

Differences Between Income Statements and Cash Flow Statements

Income statements and cash flow statements are structured differently. Income statements consist of the following parts: revenue, cost of goods sold (COGS), operating expenses, operating income, gross profit and net income. They may include other revenue- and expense-related information, but these are the basic parts of a typical income statement.

Cash flow statements, on the other hand, are structured into three parts: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

Aside from being structured differently, income statements and cash flow statements are used for different purposes. Income statements are designed to reveal how profitable a business is during a specific period of time. Cash flow statements, conversely, are designed to reveal how a business generates and manages its cash during a specific period of time.

Cash flow statements provide insight into liquidity. By generating a cash flow statement, you can see how your business spent money during the reporting period. Income statements are different in the sense that they provide insight into profitability. You can generate a cash flow statement for an overview of your business’s revenues and expenses during the reporting period.

Have anything else that you’d like to add? Let us know in the comments section below!

Payroll accounting comes with the territory of running a business. If your business has employees, you’ll need to pay them — and you’ll need to record these employee payments for both internal accounting purports and tax purposes. Mistakes can happen, however. According to the U.S. Internal Revenue Service (IRS), one-third of all employers make payroll accounting errors. Below are some of the most common payroll accounting mistakes.

#1) Classifying Employees as Contractors

One of the most common payroll accounting mistakes is classifying employees as contractors. Also known as independent contractors, contractors are workers who provide on-demand labor for a business. They don’t follow a fixed schedule, nor are they entitled to employee benefits. Misclassifying employees as contractors is an all-too-common payroll accounting mistake.

#2) Overlooking Exempt and Nonexempt Statuses

When performing payroll accounting, you’ll need to consider whether employees have an exempt or nonexempt status. There are nuances between these two statuses. Nonexempt employees, for instance, are eligible for overtime, whereas exempt employees are not. But only employees who are aren’t paid a predetermined amount of money throughout the year are typically eligible for the nonexempt status.

#3) Unpained Training

A payroll accounting mistake that’s common among small and medium-sized businesses is unpaid training. Millions of businesses require new employees to undergo a training period. Whether the training period lasts one day or two weeks, new employees must be compensated for it.

#4) Using the Wrong Tax Rate

Many businesses make the mistake of using the wrong tax rate. Tax rates vary from year to year. Just because you used the correct tax rate for your business’s employees last year, you may need to use a different tax rate this year. As a business owner, it’s your responsibility to stay on top tax changes, including tax rates for federal income, state income, unemployment and more.

#5) Not Keeping Records

Another common payroll accounting mistake to avoid is not keeping records. Some businesses — particularly small businesses — assume that records aren’t necessary. If they only have a few employees on their payroll, they may pay their employees without keeping records. But the IRS requires all businesses, regardless of size, to maintain payroll records.

#6) Performing Payroll Accounting Manually

You shouldn’t attempt to perform payroll accounting manually. Even if your business is small with only a few employees, you should take advantage of software. Accounting software like QuickBooks supports payroll accounting. You can use it to easily handle all of your business’s payroll accounting needs.

Have anything else that you’d like to add? Let us know in the comments section below!

A cash flow statement is an important financial document used by businesses. Also known as a statement of cash flows, it provides insight into the money coming into and going out of a business. Regardless of your business’s size or operations, you may want to create a cash flow statement. You can use it to secure financing, plan a budget and more. While there are different ways to create a cash flow statement, they all revolve around three main parts.

#1) Operating Activities

You’ll need to include a section for operating activities in your cash flow statement. It’s arguably the most important section in cash flow statements. As the name suggests, the operating activities section focuses on operational activities. It contains all incoming and outgoing money that’s directly associated with a business’s products or services.

Examples of operating activities include the following:

• Revenue from product or service sales
• Accounts receivable
• Employee payroll
• Rent and lease payments
• Utilities

#2) Financing Activities

In addition to operating activities, cash flow statements should contain a financing activities section. Financing activities include transactions associated with a business’s financing. If your business is financed with a loan, for instance, you’ll have to make payments to the lender. Loan payments such as this are considered financing activities. And like other financing activities, you should record them in the financing activities section of your business’s cash flow statement. If you make payments to a lender for a loan — or if a borrower makes loan payments to your business — you should record them in the financing activities section of your business’s cash flow statement.

#3) Investing Activities

Finally, the investing activities section focuses on investments. Investments, of course, will affect your business’s cash flow. You may purchase assets, such as equipment, for business. Alternatively, you may sell some of your business’s assets. These are considered investing activities, and you should record them in the investing activities of your business’s cash flow statement.

In Conclusion

They may sound complex, but cash flow statements use a relatively simple format. They feature three main parts: an operating activities section, a financing activities section and an investing activities section. The operating activities section covers all incoming and outgoing cash associated with operational activities. The financing activities section covers all incoming and outgoing cash associated with financing. And the investing activities section covers all incoming and outgoing cash associated with investments.

Have anything else that you’d like to add? Let us know in the comments section below!

Allowing accounting errors to go unchecked can have a disastrous effect on your small business’s operations. It may hinder your business’s ability to secure loans or other forms of financing, or it can leave your business susceptible to tax audits. By following these tips, however, you can avoid accounting errors with your small business.

Stick With a Single Accounting Method

You can avoid accounting errors by sticking with a single accounting method. There are two primary accounting methods: cash basis and accrual. The cash basis method involves recording revenue transactions when you receive payment from customers and expense transactions when you pay vendors. The accrual method, on the other hand, involves recording transactions when they are incurred, such as when invoices are sent or bills are received.

Use QuickBooks

For greater protection against accounting errors, use QuickBooks. QuickBooks has become the preferred accounting solution for small businesses. Research shows that nearly 30 million small businesses use it to keep track of their financial transactions. It’s beginner friendly, scalable and loaded with helpful features. By using QuickBooks, your small business will be better protected against accounting errors.

Limit Access

Who can access your business’s accounting data? You may want to limit access to it. Allowing all of your small business’s employees to access its accounting data is a recipe for disaster. Some of them may make inaccurate entries that throw off your books. For cleaner records, you should consider limiting access to only accountants or other workers who need it.

Create Backups

Don’t underestimate the importance of creating backups. If you lose some or all of your business’s accounting data, you may be forced to start all over again from scratch — unless, of course, you have a backup copy. A backup copy will give you peace of mind knowing that your business’s accounting data is safe. Just remember to create backups regularly. You should also store the backup copies in multiple places, such as a cloud server and a local computer or machine.

Reconcile Accounts

Another tip to prevent accounting errors is to reconcile your business’s accounts. QuickBooks has a built-in reconciliation tool. You can use it to match your recorded transactions with those listed on your business’s credit card and bank statements. A process known as reconciliation, it will allow you to catch errors and discrepancies before they snowball into bigger problems.

Have anything else that you’d like to add? Let us know in the comments section below!

Expenses are inevitable when running a business. Regardless of what products or services exactly your business sells, it will incur expenses. While all expenses are operational costs, there are different types of expenses, such as prepaid expenses.

Overview of Prepaid Expenses

Prepaid expenses are business-related expenses that are paid for in advance. If you pay for goods or services to use in your business’s operations but don’t receive those goods or services until a later date, you should record them as prepaid expenses. They are “prepaid” in the sense that you pay for them before you receive them.

Common examples of prepaid expenses include the following:

• Rent or lease payments
• Insurance
• Utilities
• Interest

How to Record Prepaid Expenses

How do you record prepaid expenses? Because they are paid for in advance, you’ll typically need to record them as current assets, followed by expenses. You can record them in a prepaid asset account on your business’s balance sheet. You can then reduce these asset accounts by making entries to expense accounts.

Unlike other expenses, prepaid expenses are recorded as current assets — at least initially. This is due to the fact that they are paid for in advance. Prepaid expenses involve business-related goods or services that are paid for in advance. You won’t receive them immediately when you pay for them. It make several days, weeks or even months until you receive them. And because they are paid for in advance, prepaid expenses are recorded as current assets. After the prepaid expenses have been realized, they are later recorded as expenses.

Prepaid vs Accrued Expenses

In addition to prepaid expenses, there are accrued expenses. Both prepaid and accrued expenses are business-related expenses, but don’t let that fool you into thinking they are the same. Prepaid and accrued are two different types of expenses.

Accrued expenses are essentially the opposite of their prepaid counterparts. Prepaid expenses involve paying for goods or services in advance, whereas accrued expenses involve paying for goods or services after you receive them.

In Conclusion

There are many different types of expenses. Prepaid expenses are expenses that are paid for in advance. Most rent and lease payments are considered prepaid expenses. If you rent or lease real property for your business, you’ll have to make those payments in advance. Therefore, they are considered prepaid expenses.

Have anything else that you’d like to add? Let us know in the comments section below!

Accounting is often referred to as the language of business. It’s a label originally given by Warren Buffet. In 2014, the famous investor and philanthropist was doing a news segment with CNBC. During the segment, Buffet advised a caller to study accounting while coining it the language of business. Other people have since jumped on the bandwagon by referring to accounting as the language of business.

All Businesses Need It

Regardless of what they sell, all businesses need accounting. It provides insight into their finances, including their revenue and expenses. Without accounting, businesses will struggle to achieve their financial goals. Whether a business operates in the business-to-consumer (B2C) or business-to-business (B2B) industry, it will need accounting. The universal need for accounting is one of the reasons why it’s considered the language of business.

It Paints a Picture

Accounting paints a picture of a business’s financial health. Statistics show that over half of all new small businesses opened in the United States will fail within their first years. While small businesses can fail for different reasons, poor financial health is often the leading cause. Businesses that aren’t profitable won’t be able to sustain their operations — at least for any extended period. They may be able to borrow money by obtaining loans or other forms of debt financing, but they’ll eventually be forced to close their doors. With accounting, businesses will have a better understanding of their financial health.

It Has Its Own Terms

Another reason accounting is considered the language of business is because it has its own terms.  The term “balance sheet,” for instance, refers to a report that lists a business’s assets, liabilities and shareholder equity. The term “cost of goods sold,” on the other hand, refers to all direct expenses associated with the production of goods or services sold by a business. There are dozens of accounting terms. All languages have their own terms. And accounting has its own terms, so it’s considered the language of business.

It’s Structured

Accounting is structured. It consists of specific rules that businesses must follow when tracking and recording their financial transactions. Many businesses use the Generally Accepted Accounting principles (GAAP). Originally adopted by the U.S. Securities and Exchange Commission (SEC), it’s become synonymous with accounting. The GAAP consists of rules that, when used by businesses, provide structure.

Have anything else that you’d like to add? Let us know in the comments section below!