Accounting

4 Reasons to Consider Using Fiscal Year Accounting

If you currently use calendar years for accounting, you might be wondering whether switching to fiscal years is worth it. Calendar years and fiscal years both consist of 365 days. Calendar years simply begin on January 1 and end on December 31. Fiscal years, on the other hand, can begin on any day of the year and end 12 months later. A fiscal year can end during any month except for December. The U.S. Internal Revenue Service (IRS) doesn’t allow businesses to use fiscal years that end in December. When should you consider using fiscal years for accounting exactly?

#1) Seasonal Sales

Businesses that generate seasonal sales often use fiscal years for accounting. From commercial landscaping and pressure washing to pool installation and more, countless businesses generate seasonal sales. Seasonal sales means most if not all of their sales occur during a specific time of year, such as the summer or winter. If your business falls under this category, you may want to use fiscal years for accounting. You can specify your own 12-month accounting period.

#2) Alleviate Taxes

You should consider using fiscal years for accounting to alleviate taxes. While some businesses incur major expenses in December, others incur major expenses during the beginning of a calendar year. In other words, they buy goods and services from vendors at the beginning of the year. Using fiscal years for accounting will allow you to claim these expenses on your business’s taxes. You can receive deductions for expenses — even if those expenses occurred in January or February.

#3) Smoother Tax Filings

Another reason to consider using fiscal years for accounting is smoother tax filings. April is a busy time of year for the IRS. It receives and processes millions of tax filings during this month. If you use calendar years for accounting, you’ll have to submit your business’s taxes by the April due date. Switching to fiscal years, though, will allow you to choose a different month. And by doing so, you can expect a faster, smoother filing process.

#4) Save Money on Professional Accounting and Tax Services

You may even save money on professional accounting and tax services by switching to fiscal years. Professional accountants may charge less for their services during the slow months of the year. Since most businesses, as well as people, use calendar years, April is typically their busiest month. Using calendar years means you’ll have to file your business’s taxes by the due date in April. Fiscal years, though, will allow you to choose a different 12-month period. As a result, you may save money on professional accounting and tax services.

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A Crash Course on Cost Basis: What You Should Know

If you purchase assets for investment purposes, you’ll need to track your cost basis. The Internal Revenue Service (IRS) uses this information to determine tax liabilities. After selling a given asset, you’ll have to report your cost basis for that asset on your taxes. By properly tracking, as well as reporting your cost basis, you can rest assured knowing that you are filing your taxes correctly.

What Is Cost Basis?

The term “cost basis” refers to the original purchase price of an asset. It’s used to calculate capital gains and capital losses (see below).

Assets are items of monetary value. They can include tangible items like real estate and equipment, and they can include intangible items like stocks and bonds. The value of an asset, however, may change over time. Assets typically don’t retain their original value indefinitely. Some of them will appreciate, whereas others will depreciate. Regardless, the cost basis of an asset is the original purchase price. It represents the price you paid to acquire the asset.

Cost Basis and Capital Grains vs Losses

The IRS requires taxpayers to report their cost basis after selling assets. When you sell an asset, you’ll either incur a capital gain or a capital loss. Capital gains occur when you sell an asset for a higher price than that for which you purchased it. Capital losses, on the other and, occur when you sell an asset for a lower price than that for which you purchased it. The IRS calculates capital gains and capital losses using the reported cost basis of assets. The difference between the sale price of an asset and the cost basis of the asset will determine capital gains or capital losses.

With capital gains, you’ll incur tax liabilities. There are short-term and long-term capital gains. Short-term capital gains involve assets that are held for less than one year. Long-term capital gains involve assets that are held for longer than one year. Tax rates vary depending on income, but short-term capital gains always come with higher tax liabilities than long-term capital gains.

In Conclusion

Selling an asset is considered a taxable event. And like other taxable events, you’ll have to report it to the IRS. When filing your taxes for the year in which you sold the asset, you’ll need to report your cost basis. It’s essentially the original purchase price of the asset, and it will determine your capital gains or capital losses.

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Financial Accounting vs Auditing: What’s the Difference?

Think accounting is the same as auditing? Think again. While they both involve the analysis of a business’s financial transactions, they aren’t the same. Accounting and auditing are two different financial processes, each of which works in a different way

What Is Accounting?

Accounting is the process of documenting and recording financial transactions associated with a business. Businesses make money, and they spend money. They make money primarily by selling products or services to their target audience. And businesses spend money on payroll, equipment, inventory, insurance and other expenses so that they can perform these sales operations.

Businesses must track both credit- and debit-based financial transactions. By tracking their financial transactions, they can prepare their taxes, cut costs and, ultimately, maximize their profits. This is where accounting comes into play. Accounting allows businesses to track their financial transactions using a set of formal guidelines or accounting principles.

What Is Auditing?

Auditing is the process of evaluating financial transactions, as well as accounting documents, for errors. Most businesses use generally accepted accounting principles (GAAP) when performing accounting. To ensure that their accounting documents comply with the GAAP, businesses may conduct an audit. They can audit their accounting documents while checking for errors such as unrecorded liabilities or unrecorded asset depreciation.

Reconciliation is an auditing process. Available in QuickBooks – as well as other accounting software products – it involves checking the transactions on a bank statement to those recorded in the accounting software. Each transaction should be listed on the appropriate bank statement and in the accounting software.

Differences Between Accounting and Auditing

Accounting and auditing aren’t the same. Accounting revolves around documenting and recording financial transactions. Auditing, on the other hand, revolves around checking financial transactions and accounting documents for errors.

Accounting and auditing also have different goals. The primary goal of accounting is to record all of a business’s financial transactions while following a set of guidelines or principles, such as the GAAP. The primary goal of auditing, conversely, is to check the accuracy of financial transactions and accounting documents.

Businesses may perform accounting and auditing either in-house, or they may outsource it. Regardless, accounting and auditing are essential financial processes. They are necessary for nearly all businesses. Accounting is all about documenting and recording financial transactions, whereas auditing is all about checking financial transactions and accounting documents for errors. They are different businesses-related financial processes.

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What Is Activity-Based Costing in Accounting?

Tracking expenses is an essential part of accounting. You’ll need to know how much money your business spends on various goods and services so that you can deduct them from your taxes. Rather than grouping all of your businesses together, though, you may want to use activity-based costing. Activity-based costing will provide deeper insight into your business’s expenses by allowing you to assign them to activities.

The Basics of Activity-Based Costing

Activity-based costing is the process of assigning expense costs – specifically overhead-related expenses – to activities. It’s commonly used in the manufacturing industry. Manufacturing companies in the United States and abroad often prefer activity-based costing. With activity-based costing, they can assign their overhead expenses to activities. As a result, they can closely track their expenses.

How Activity-Based Costing Works

Activity-based costing revolves around activities. What are activities exactly? In accounting, an activity is any action for which your business incurs an expense. Purchasing new equipment can be considered an activity. Fulfilling a customer’s purchase order can also be considered an activity.

Benefits of Activity-Based Costing

It may sound confusing, but activity-based costing is relatively simple; you just need to assign expenses to activities. Some expenses may have a single activity, whereas others may have multiple activities Activity-based costing involves the assignment of expenses to activities.

You can use activity-based costing to improve your business’s cash flow. If your business operates in the manufacturing industry, it may suffer from a poor cash flow if it produces a surplus of products. If your business produces more products than what it sells, for example, its cash flow will suffer. Activity-based costing can help you improve your business’s cash flow by revealing the activities associated with your business’s production process.

With activity-based costing, you can break down your business’s expenses into the following categories: fixed expenses, variable expenses and overhead expenses.

Another benefit of activity-based costing is product pricing. You’ll have an easier time setting the right price points for your business’s products if you use activity-based costing. You can evaluate the activities associated with your business’s production process. With this information, you can create the perfect price points that allow for maximum profitability while keeping your business’s expenses in check.

Not all businesses use activity-based costing. Nonetheless, it offers several benefits. Activity-based costing is simple, can improve your business’s cash flow, provides insight into expenses and can help with product pricing.

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Accrual Accounting: 5 Things You Need to Know

Have you heard of the accrual accounting method? It involves recording revenue and expenses when the respective transactions occur. If your business sells services, for instance, revenue-generating transactions may occur before customers actually pay you. With the accrual accounting method, you can record revenue and expenses before money is exchanged. Here are five things you need to know about the accrual accounting method.

#1) Opposite of Cash Accounting

The accrual accounting method is the opposite of the cash accounting method. The U.S. Internal Revenue Service (IRS) supports both types of accounting methods. The cash accounting method involves recording revenue and expenses at the time when money is exchanged. The accrual accounting method, conversely, involves recording revenue and expenses when the transactions occur.

#2) Preferred Method By Medium and Large Businesses

While the IRS supports the cash accounting method and the accrual accounting method, medium and large businesses typically prefer the latter method. Individuals and small businesses typically prefer the cash accounting method. You can typically use either accounting method; just remember to stick with a single accounting method.

#3) Involve Double-Entry Bookkeeping

The accrual accounting method involves double-entry bookkeeping. Double-entry bookkeeping is an accounting technique in which you record transactions twice. If you sell a service for $10,000, you will record a debit of $10,000 when the transaction occurs. Once you receive payment from the customer, you would record a credit of $10,000 to the same accounts receivable and then another $10,000 for a revenue account.

#4) There’s a Hybrid Method

When most people think of accounting methods, they envision the accrual accounting method and the cash accounting method. But there’s another accounting method available: the hybrid method. As you may have guessed, the hybrid method combines elements of both the accrual accounting method and the cash accounting method.

#5) Offers Real-Time Insight Into Financial Health

You’ll have a better understanding of your business’s financial health if you use the accrual accounting method. The accrual accounting method offers real-time insight into your business’s financial health. With the cash accounting method, you won’t realize revenue and expenses until money is exchanged. The accrual accounting method takes a different approach by realizing them when the transactions occur.

There are different methods that you can use to track and record your business’s financial transactions, some of which include the cash accounting method, the accrual accounting method and the hybrid accounting method. The accrual account method is the opposite of the cash accounting. It’s preferred by medium and large businesses, involves double-entry bookkeeping and offers real-time insight into financial health.

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What Are Direct Costs and How Do They Affect Your Business?

Not all business-related expenses are the same. They can be classified as indirect costs or direct costs, depending on how they are used. Direct costs are typically more important than indirect costs. What are direct costs, and how do they affect your business?

What Are Direct Costs?

Direct costs are business-related expenses that go towards a business’s money-making operations. They are known as “direct costs” because they are directly linked to products or services. Your business must spend money on goods or services so that it can sell its own products or services to customers.

Whether your business sells products or services, it will incur direct costs. Direct costs are expenses that are necessary for your business to sell its products or services. If your business manufactures products, for instance, it may incur direct costs like labor, machinery and utilities. Your business won’t be able to manufacture and sell its products without these direct costs.

Direct vs Indirect Costs

Indirect costs are business-related expenses as well, but they aren’t the same as direct costs. Direct costs are essential to your business’s money-making operations, whereas indirect costs are not. Rather, indirect costs are expenses that aren’t directly linked to products or services.

Another difference between direct costs and indirect costs is that only the former has a cost object. Cost objects are accounting items. They represent products, services, or in some cases, customers. When recording direct costs, you’ll need to associate them with a cost object. Each direct cost must be associated with a cost object. Indirect costs aren’t associated with a cost object. You can record indirect costs without worrying about cost objects.

Examples of indirect costs include:

  • Insurance
  • Marketing
  • Office Supplies

The Impact of Direct Costs

Like all business-related expenses, direct costs can impact your business’s cash flow. Cash flow is a measurement of money coming into and out of your business. As your business generates revenue, it will have to spend some of that money on direct costs.

There’s no way to avoid direct costs. All businesses will incur at least some direct costs. The good news is that there are ways to lower your business’s direct costs. If you’re spending too much money on wholesale products, for example, you may want to choose a different vendor. If you’re overpaying for machinery, you may be able to save money by purchasing used machinery rather than new machinery.

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What Is a Personal Guarantee for a Business Loan?

When applying for a business loan, you may have to make a personal guarantee. They aren’t required for personal loans. Business loans, though, often require a personal guarantee. Whether you’re trying to obtain a business loan from a bank or alternative lender, you may be required to make a personal guarantee.

Personal Guarantees Explained

A personal guarantee is a binding pledge or commitment that guarantees a business loan with the borrower’s personal finances. Business loans, of course, are intended for businesses. If you own a business, you can obtain a business loan to finance it. You can then use these borrowed funds to expand into new territories, invest in marketing, develop new products or otherwise grow your business. But the lender may require you to make a personal guarantee.

By making a personal guarantee, you are placing your personal finances on the line. As long as you pay back the business loan according to the lender’s terms, nothing will happen to your personal finances. If you default on the business loan, however, the lender may claim ownership of your personal assets.

Is a Personal Guarantee Necessary?

Many lenders require a personal guarantee for their business loans. Lenders must evaluate a borrower’s risk of default. If a borrower has bad credit, the lender may require him or her to make a personal guarantee. It’s the equivalent of collateral. A personal guarantee will provide the lender with recourse if the borrower defaults on the business loan. The lender can claim ownership of the borrower’s personal assets to make up for the lost money.

Of course, there are instances in which you may not be required to make a personal guarantee. If your business has good credit, for instance, lenders may not require a personal guarantee. Good business credit is a sign of trustworthiness. It indicates that lenders can trust your business to repay its debts, including its loans.

Even if it’s not required, a personal guarantee offers advantages. It can help you achieve a lower interest rate. Lenders may offer lower interest rates on business loans if you make a personal guarantee. A personal guarantee can also speed up the approval process. Lenders may approve your application more quickly, resulting in fast cash for your business.

In Conclusion

A personal guarantee is a commitment to repay a business loan using your personal finances. Many lenders require it, especially for businesses with bad credit.

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What Are Non-Operating Assets?

Business accounting requires an understanding of assets. All businesses have assets. Assets are economic resources or items of value that can be exchanged for cash. Not all assets are the same, however. There are different types of assets, including non-operating assets. What are non-operating assets exactly, and how do they differ from operating assets?

Non-Operating Assets Defined

Non-operating assets are economic resources or items of value that aren’t used in a business’s core operations. As a business owner, you may rely on certain assets to facilitate your business’s money-making operations. Different businesses use different assets to make money. Assets that aren’t used to make money on behalf of your business are non-operating assets. They are known as “non-operating assets” because they aren’t used in your business’s operations. Rather, your business owns the assets for other purposes, such as appreciation.

Non-Operating vs Operating Assets

Assets can be classified as non-operating or operating depending on how they are used.  Non-operating assets aren’t used in your business’s operations, whereas operating assets are used in your business’s operations.

Some of the most common types of non-operating assets include real estate, cash, accounts receivables, excess and unused equipment and vacant buildings. These are all economic resources or items of value, and you can exchange all of them for cash. Nonetheless, your business won’t use these economic resources in its operations, so they are classified as non-operating assets rather than operating assets.

Why Non-Operating Assets Are Important

Non-operating assets are important because they affect your business’s valuation. If your business has a lot of non-operating assets, it will be valued higher. A high valuation, of course, will allow you to secure more financing without giving up a large portion of your business’s equity.

Equity financing involves a valuation. If you want to obtain financing from an investor, you’ll have to agree to sell a portion of your business’s equity to the investor. The amount of money that the investor pays for your business, as well as the portion of the equity, will determine your business’s valuation. Business valuations are affected by non-operating assets. The more non-operating assets your business has, the higher your business’s valuation will be.

Like all assets, non-operating assets are tax-deductible. You can deduct the cost of non-operating assets from your business’s taxes. If you spend $100,000 on non-operating assets in a given year, you can typically deduct $100,000 from your business’s taxes.

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The Basics of Payroll Accounting and How It Works

Payroll accounting is something that nearly all business owners will have to perform. Unless you operate a sole proprietorship, you’ll probably have employees whom you must pay. Some businesses have hundreds of employees, whereas others have thousands of employees. Even if your business only has a few employees, though, you’ll have to pay them. What is payroll accounting, and how does it work exactly?

What Is Payroll Accounting

Payroll accounting is the process of tracking and processing employee-related expenses. Employees don’t work for free. When you hire an employee, you’ll have to agree to compensate him or her.

Employee compensation can consist of hourly wages, annual salaries, sale commissions, bonuses and more. The term “payroll accounting” refers to paying employees their agreed-upon compensation and tracking these payments for recordkeeping purposes.

Payroll accounting also encompasses tax withholdings, including Social Security and Medicare taxes. As a business owner, you may be required to withhold taxes from your employees’ compensations. Payroll accounting includes tracking and processing ta withholdings such as this.

How Payroll Accounting Works

You can perform payroll accounting in different ways. There’s in-house payroll accounting, for instance, and there’s outsourced payroll accounting. If you perform it yourself — or if another employee who works for your business performs it — it’s considered in-house payroll accounting. Outsourced payroll accounting involves partnering with a third party. There are accountants, for instance, who offer payroll accounting services. You can partner with an accountant so that he or she handles your business’s payroll accounting.

QuickBooks Payroll

QuickBooks offers a payroll accounting solution. If you currently use QuickBooks Desktop, for example, you can sign up for Enhanced Payroll. Enhanced Payroll is an optional add-on service for QuickBooks Desktop. As the name suggests, it provides enhanced payroll accounting features that aren’t otherwise included in the standard version of QuickBooks Desktop.

With Enhanced Payroll, you can create W-2s for your business’s employees and 1099s for your business’s contractors. This optional add-on service also offers automatic tax calculations. You won’t have to manually calculate payroll-related taxes. Instead, QuickBooks will calculate it automatically if you have Enhanced Payroll.

Another feature of Enhanced Payroll is electronic tax filings. You can file tax forms online with Enhanced Payroll. You won’t have to manually print and file tax forms at the end of the year. Rather, you can take advantage of electronic tax filings with Enhanced Payroll.

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Revenue vs Cash Flow: What’s the Difference?

Revenue and cash flow are two of the most important financial metrics for your businesses. Regardless of what products or services your business, you should track its revenue and cash flow. All businesses have revenue and cash flow. Like with other financial metrics, though, revenue and cash flow will vary.

What Is Revenue?

Revenue is money that your business generates by selling its products or services. Customers, of course, will purchase your business’s products or services. Whether they pay with cash, credit cards, debit cards, checks, etc., they’ll provide your business with revenue. Your business will generate revenue from the sale of its products or services.

Keep in mind that revenue isn’t the same profits. Your business may generate revenue without turning a profit. If your business’s expenses are greater than its revenue, it won’t turn a profit. You’ll need to keep your business’s expenses lower than its revenue to turn a profit.

What Is Cash Flow?

Cash flow is a measurement of liquidity. It represents money flowing into and out of your business. Revenue is money flowing into your business. When your business generates revenue, its cash flow will typically increase.

In addition to revenue, cash flow takes into account expenses. Money flowing out of your business include expenses. When you pay for utilities, insurance, payroll or other business-related expenses, money will flow out of your business. Cash flow is a measurement of the money flowing into and out of your business.

Differences Between Revenue and Cash Flow

You can’t run a successful business without considering its revenue and cash flow. Revenue refers to money generated by your business from the sale of its products or services. Cash flow, on the other hand, is money that flows into and out of your business.

Revenue only takes into account product and service sales. Cash flow, in comparison, takes into account revenue and expenses. Cash flow is the relation between your business’s revenue — money flowing into your business — and your business’s expenses.

It’s important to note that cash flow can be positive or negative. Positive cash flow means there’s more money flowing into your business than out of your business. Negative cash flow means the opposite. With negative cash flow, more money will flow out of your business than into your business.

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