Accounting

What Is Unearned Revenue in Accounting?

When researching accounting-related terms, you may come across unearned revenue. Revenue is the money that businesses generate from selling their respective goods or services. All businesses generate revenue. With that said, revenue may be considered unearned depending on whether the purchased goods or services have been delivered to the customer.

The Basics of Unearned Revenue

What is unearned revenue exactly? The term “unearned revenue” refers to revenue generated from the sale of goods or services that haven’t been delivered to the customer. A customer may pay for a product or service upfront. Construction services, for instance, often require customers to pay for at least some of the total cost upfront. Earned revenue consists of prepaid revenue such as this. Revenue is simply classified as unearned if the purchase product or service hasn’t been delivered to the customer.

Unearned vs Earned Revenue: What’s the Difference?

Unearned revenue isn’t the same as earned revenue. Also known as accrued revenue, earned revenue is revenue from the sale of goods or services that have been delivered to the customer. In comparison, unearned revenue involves the sale of goods or services that haven’t been delivered to the customer.

Some businesses only generate earned revenue. Local retail stores typically fall under this category. Most local retail stores will transfer their products to their customers at the time of the payment. When a customer pays for a product, the local retail store will exchange the product for money. As a result, local retail stores don’t generate unearned revenue; they only generate earned revenue.

Tips on Recording Unearned Revenue

If your business generates unearned revenue, you’ll need to record it. Both types of revenue need to be recorded. You can record unearned revenue in several ways. One of the easiest ways is to add a credit to one account and a debit to another account. This method is known as double-entry bookkeeping.

You can create a new account specifically for unearned revenue. Upon generating unearned revenue, add a credit for the amount of the unearned revenue to this new account. You can then add a debit to a separate cash account. With double-entry bookkeeping, recording unearned revenue is a breeze. You just need to add a credit to one account and a debit to the other account.

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When to Use Adjusting Journal Entries in Quickbooks

Not all journal entries are the same. In Quickbooks, you can create journal entries that change the balance of a given account. Known as adjusting journal entries, they’ll directly change the balance of the account for which they are created. When should you use adjusting journal entries exactly? Below are several common instances in which journal entries can prove useful.

Record Bank Fees

You may want to use adjusting journal entries to record fees. Banks charge fees for different reasons. You may incur an overdraft penalty fee, for instance, if you attempt to pay for a product or service without a sufficient amount of money in your bank account. Whether it’s an overdraft penalty fee or any other fee, though, you can record them with adjusting journal entries. Creating an adjusting journal entry for a bank fee will change the account to the appropriate amount.

Record Credit Card Interest

In addition to bank fees, you can use adjusting journal entries to record credit card interest. Nearly all credit cards charge interest on the unpaid balance. You can avoid this interest by paying off your credit cards at the end of each month. Of course, most business owners and consumers will carry at least some balance on their credit cards. For business-related credit card interest, you may want to use adjusting journal entries. Adjusting journal entries will allow you to record both bank fees and credit card interest fees.

Record Deprecation Expenses

You can use adjusting journal entries to record deprecation expenses. Fixed assets lost their value over time. Just because you pay a specific amount of money for an asset doesn’t necessarily mean that it will hold that value indefinitely. Most fixed assets will gradually lose their value. It’s a process known as deprecation. With adjusting journal entries, you can record expenses associated with asset deprecation such as this.

How to Create Adjusting Journal Entries in Quickbooks

You can find create adjusting journal entries by using Quickbooks Online Accountant. From the “Go to Quickbooks” menu, choose your business and select the “+ New” option. You can then choose “Journal entry,” followed by ticking the box for “Is Adjusting Journal Entry?”

On the next screen, you can enter the information for the adjusting journal entry. Clicking “Save and close” will then add the adjusting journal entry while automatically updating the account with which it’s used.

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Quickbooks Online and Web Browser Cookies: What You Should Know

Quickbooks Online has become one of the most popular accounting solutions. It’s a cloud-based software service that you can use to manage your business’s finances. As a cloud-based software service, though, Quickbooks Online uses web browser cookies. It will store certain types of data in these temporary files. To learn more about Quickbooks Online and how it uses web browser cookies, keep reading.

What Are Web Browser Cookies?

Also known simply as cookies, web browser cookies are files that are designed to store data for a specific website or web page. They are typically created automatically. When you visit a website, the site may create one or more cookies while simultaneously sending those files to your web browser. Your web browser will then store the cookie or cookies.

Why Quickbooks Online Uses Web Browser Cookies

According to Intuit, web browser cookies allow Quickbooks Online to run faster. Quickbooks Online is a cloud-based software service. In other words, it’s accessed over the internet. And just like other websites, Quickbooks Online creates web browser cookies. It will store data about your account in these files, allowing for improved usability.

Problems can occur with web browser cookies, however. Normally, you’ll only have to sign in to your Quickbooks Online account a single time. Cookie-related problems, though, may require you to sign in multiple times. After entering your username and password, Quickbooks Online may ask you to sign in again. Alternatively, you may struggle to access specific features in Quickbooks Online if there are problems with your web browser cookies.

How to Fix Cookie-Related Problems

Fortunately, you can easily fix cookie-related problems. Whether you’re forced to sign in to your Quickbooks Online multiple times, or if you’re unable to access specific features, you can delete your web browser cookies to fix problems such as these.

When you delete your web browser cookies, you’ll lose certain types of data related to your Quickbooks Online account. Don’t worry, though. You won’t lose any important data. The data will typically consist of personalization settings as well as your login credentials. You can delete these cookies from your web browser’s settings menu. Different web browsers have different settings menu. Nonetheless, they all allow you to delete cookies. After deleting your web browser cookies, restart your web browser and log back in to Quickbooks Online.

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Certified Financial Planner (CFP) vs Certified Public Accountant (CPA): What’s the Difference?

Many business owners assume that Certified Financial Planners (CFPs) and Certified Public Accounts (CPAs) are the same. When they need assistance recording and tracking transactions, business owners may use the services of a CFP or CPA. CFPs and CPAs offer their services to business owners. While both CFPs and CPAs focus on financial services, though, they aren’t the same. What’s the difference between a CFP and CPA exactly?

What Is a CFP?

A CFP is a professional financial advisor who offers strategic advice on how to budget, pay down debt, invest and manage assets. As their name suggests, their goal is to help clients “plan” their finances. CFPs are financial planners. Their clients can consist of business owners as well as consumers. Business owners and consumers who need help planning their finances may partner with a CFP.

What Is a CPA?

A CPA, on the other hand, is a professional accountant. CPAs are typically regulated by the state in which they practice. To work as a CPA, for instance, individuals must obtain a license from their respective state’s regulatory board. CPAs perform accounting tasks on behalf of their clients. Some of the accounting tasks performed by CPAs include tax preparation, expense and revenue tracking, generation of financial statements and consulting. CPAs offer their services primarily to business owners, but some consumers may use their services as well.

Differences Between a CFP and CPA

CFPs and CPAs aren’t the same. CFPs offer financial planning services, whereas CPAs offer accounting services. As a business owner, you can partner with either of them. When choosing between a CFP and CPA, though, you must consider your business’s needs.

If you need help tracking your business’s expenses and revenue — or help preparing your business’s taxes — you should typically partner with a CPA. CPAs specialize in accounting. Taxes, of course, are an essential part of accounting. A CPA can provide accounting services for your business to ensure all its expenses and revenue are properly tracked.

A CFP is a better choice if your business needs help planning its financial strategy. If your business is struggling with poor cash flow, for instance, you may want to partner with a CFP. CFPs can provide consultation services that allow you to pay down your business’s debt and, ultimately, increase your business’s cash flow.

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What Is a Profit and Loss Statement?

Have you heard of profit and loss statements? They are commonly used in accounting. Businesses of all sizes and in all industries use them in their accounting strategies. They generate profit and loss statements so that they can track their profitability or lack thereof. If this is your first time hearing about them, there are a few things you should know about profit and loss statements.

The Basics of a Profit and Loss Statement

A profit and loss statement is an accounting document that, as the name suggests, reveals a business’s financial profits or financial losses over a predetermined period. Most businesses generate them quarterly. At the end of each quarter, they’ll generate a profit and loss statement. With that said, some businesses generate them per calendar year or fiscal year. Regardless, all profit and loss statements outline a business’s financial profits or financial losses over a predetermined period.

Cash vs Accrual Method

Profit and loss statements can be created in one of two ways: the cash method or the accrual method. The cash method involves recording transactions at the time when money enters or leaves a business. The accrual method, on the other hand, involves recording transactions when they are generated. Transactions can be generated before money enters or leaves a business, which is why the accrual method is available.

Why Profit and Loss Statements Are Important

Profit and loss statements are important for many reasons. As a business owner, you can use them to gain insight into your business’s cash flow. Generating profit and loss statements on a regular basis will allow you to see how much money is entering your business and how much is leaving your business. With this information, you can determine your business’s cash flow.

You can use profit and loss statements to reduce or eliminate unnecessary expenses. All businesses have expenses. No matter what type of products or services your business sells, you’ll probably incur operational expenses. With profit and loss statements, you can see firsthand how much money your business spends. You can then seek to reduce or eliminate unnecessary expenses.

Some businesses are legally required to generate profit and loss statements. Quarterly and annual profit and loss statements are required for publically traded businesses. If your business is publicly traded — meaning it’s not privately owned — you’ll have to generate profit and loss statements to comply with federal regulations.

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The 3 Parts of a Balance Sheet for Accounting

A balance sheet is an important document that’s used for business accounting purposes. Whether you operate your business as a sole proprietorship, an S-corp or an LLC, you should consider using it. With a balance sheet, you’ll have a better idea of how much your revenue your business generates versus its expenses. While creating a balance sheet may sound difficult, it’s actually relatively easy. All balance sheets consist of three basic parts, which include the following.

#1) Assets

You’ll need to include your business’s assets on the balance sheet. Assets, of course, are items of monetary value. They can include cash or other physical as well as non-tangible items of monetary value. When creating a balance sheet, go through your business’s assets while listing them on this document.

Some of the most common types of assets are:

  • Money
  • Real estate
  • Inventory
  • Equipment
  • Accounts receivables
  • Vehicles
  • Patents and other intellectual property
  • Market securities

#2) Liabilities

In addition to assets, you’ll need to include your business’s liabilities on the balance sheet. Liabilities are essentially the opposite of assets. While assets are items of monetary value, liabilities are debt-based items. They are items that involve an obligation to pay another person or entity. Payroll taxes, for instance, are considered a liability. You’ll have to pay taxes on your business’s payroll. Because it’s money owned by your business, it’s considered a liability.

Interest fees on loans are also considered liabilities. If you have one or more outstanding loans with which you use to finance your business, you’ll probably have to pay the lender interest. These interest fees are a form of debt. Therefore, they are considered liabilities. When creating a balance sheet, be sure to list all of your business’s liabilities so that you’ll have a clearer picture of its financial health.

#3) Owner’s Equity

The third and final part of a balance sheet is owner’s equity. While you might be familiar with assets and liabilities, owner’s equity is a little more confusing. It’s essentially the monetary value of your business that you own — or other individuals own — after accounting for both assets and liabilities.

You can calculate owner’s equity by taking your business’s assets and subtracting that number by your business’s liabilities. If your business has $500,000 in assets and $100,000 in liabilities, its owner’s equity would be $400,000. When creating a balance sheet, you’ll need to include owner’s equity.

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What Is an Accounting Period? Here’s What You Should Know

Accounting periods are an important element of an accounting strategy. They are used by all types of businesses, including small businesses and large businesses. The term “accounting period” is fairly straightforward. It refers to a period of time during which financial transactions are recorded. With that said, there are several things you should know about accounting periods when using them in your business’s accounting strategy.

Overview of Accounting Periods

An accounting period refers to a period of time during which financial transactions are recorded. A calendar year, for example, can be an accounting period. When using a calendar year as an accounting period, you’ll need to group your business’s transactions by the year in which they occurred. Each calendar year starts on January 1 and ends on December 31. Therefore, calendar years are commonly used as accounting periods.

Why Accounting Periods Are Important

You might be wondering why accounting periods are important? For starters, they serve as the foundation for a given business’s accounting strategy. With accounting periods, you can easily review all of your business’s transactions for a particular period of time. If you know what a transaction occurred, you can pull up the accounting period for that time. Doing so will reveal all of the transactions for that time.

There are also requirements regarding which type of accounting period some businesses can use. Publicly traded businesses, for instance, must release four earnings reports each year. Therefore, they are required to use four accounting periods for each calendar year.

The Different Types of Accounting Periods

There are different types of accounting periods. As previously mentioned, calendar years are commonly used as accounting periods. Most small businesses use calendar year-based accounting periods because it’s simple and convenient.

Fiscal years can be used as accounting periods as well. A fiscal year isn’t the same as a calendar year. A fiscal year is defined as any year-long period consisting of 12 whole months. It doesn’t have to begin on January 1, nor does it have to end on December 31. A fiscal year can start on any day of the year, but it must end exactly 12 months later, resulting in a complete fiscal year.

Accounting periods can be quarterly as well. Publicly traded businesses are required to use quarterly accounting periods. Quarterly accounting periods consist of three-month periods. Businesses can use multiple types of accounting periods. Some publicly traded businesses, for example, use either calendar or fiscal year accounting periods in conjunction with quarterly accounting periods.

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Why You Shouldn’t Mix Business and Personal Finances

One of the most common accounting mistakes small business owners make is mixing their business and personal finances. Rather than using two separate accounts — an account for their business finances and another account for their personal finances — they use a single account. They’ll use this single account to receive money from their business’s customers, and they’ll also use this account to pay for both business- and personal-related expenses. While mixing business and personal finances may sound harmless, it can lead to several problems.

Missed Tax Deductions

Mixing personal and business finances can result in missed tax deductions. As you may know, most business-related purchases can be deducted from your taxes. Whether it’s cleaning supplies, shipping services, insurance, inventory, etc., you can typically deduct them from your taxes. You’ll need to identify them, however. And with mixed personal and business finances, you may overlook some of these tax deductions. The end result is a higher tax liability that cuts into your business’s annual profits.

Increased Risk of Tax Audit

Speaking of taxes, mixing personal and business finances can increase the risk of a tax audit. The Internal Revenue Service (IRS) doesn’t explicitly prohibit business owners from mixing their business and personal finances. It does, however, require them to maintain complete accounting records. Mixing business and personal finances can make it difficult to create complete accounting records. All of your business-related transactions will be tied to the same account as your personal transactions. The end result is messy and incomplete accounting records that place you at a greater risk of a tax audit.

Unprofessional Brand Image

Another reason to avoid mixing personal and business finances is that it creates an unprofessional brand image. You may need to write checks on behalf of your business. Maybe you’re purchasing inventory from a supplier, or perhaps you’re refunding a client or customer. Regardless, if you mix your personal and business finances, you’ll have to write checks from your personal account, which will also be used for your business-related transactions. The supplier, client or customer will see your personal name on the check rather than the name of your business.

The bottom line is that you should use separate accounts for your business and personal finances. Mixing these finances together under a single account can lead to missed tax deductions, an increased risk of a tax audit and an unprofessional brand image.

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Pros and Cons of Using the Cash Basis Accounting Method

There are different accounting methods that you can use to track your business’s finances. Two of the most popular include the accrual method and the cash basis method. The accrual accounting method involves recording transactions — both revenue and expense transactions — when they occur. The cash basis accounting method, on the other hand, involves recording transactions your business receives the payment or sends the payment. There are several pros of cons of using the cash basis accounting method.

Pro: Easier

When compared to the accrual accounting method, the cash basis accounting method is easier. You can use it by evaluating your business’s bank account. The cash basis accounting method focuses on recording transactions when your business receives payments or sends payments. If you discover a new transaction in your business’s bank account, you can record it. The cash basis accounting method is particularly easy, making it a popular choice among small businesses.

Con: Doesn’t Reveal All Liabilities

One of the disadvantages to using the cash basis accounting method is that it doesn’t reveal all liabilities. Liabilities can occur when your business purchases a product or service but doesn’t immediately pay for it. With the cash basis accounting method, you’ll only record expense transactions when your business makes a payment. Therefore, liabilities such as this may go unnoticed — at least for a short period of time.

Pro: Tax Savings

You may be able to take advantage of tax savings by using the cash basis accounting method. The Internal Revenue Service (IRS) doesn’t necessarily offer lower tax rates to businesses that use the cash basis accounting method. Nonetheless, it may lower your business’s taxes. With the cash basis accounting method, you can wait to record transactions when the money enters or leaves your business’s bank account.

Con: Restricted Usage

There are restrictions regarding which businesses can use the cash basis accounting method. The IRS, for instance, typically prohibits businesses from using this alternative accounting method if they are classified as a corporation You can still use the cash basis accounting method if your business is a sole proprietorship or an LLC. If it’s a corporation, though, you’ll have to use the accrual accounting method.

When choosing an accounting method, you should weigh the pros and cons. The cash basis accounting method is easy and potentially offers tax savings benefits. With that said, it fails to reveal all liabilities and it’s allowed by the IRS for some businesses.

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An Introduction to the Accounting Equation

Have you heard of the accounting equation? It’s commonly used in double-entry accounting. If your business uses the double-entry accounting method, you may want to use the accounting equation as well. The accounting equation, in fact, is the heart of the double-entry accounting method. Before using it, though, there are a few things you should know about the accounting equation and how it works.

What Is the Accounting Equation?

The accounting equation is the foundation for the double-entry accounting method. Also known as the balance sheet equation, it expresses the relationship between a businesses’ assets, liabilities and owner’s equity. With the accounting equation, you can rest assured knowing your business’s balance sheet is, in fact, balanced.

Of course, you’ll only need to use it if your business uses the double-entry accounting method. The double-entry accounting method requires the use of the accounting equation. If your business uses the single-entry accounting method, you can skip the accounting equation. The single-entry accounting method is easier than its double-entry counterpart. With the single-entry accounting method, transactions are recorded in a single place. The double-entry accounting method differs in the sense that it involves records of transactions in at least two places.

How to Use the Accounting Equation

You can use the accounting equation by adding up your business’s liabilities and owner’s equity. The accounting equation lives up to its namesake by featuring an equation for accounting. The equation consists of assets = liabilities + owner’s equity.

Assets, of course, are tangible and intangible items of value that your business owns. Common examples of assets include property, cash, inventory, accounts receivables, equipment and supplies. The accounting equation also takes into account liabilities. Liabilities are a debt. While accounts receiveables are considered assets, accounts payables are considered liabilities. Finally, there’s owner’s equity. Owner’s equity is the collective investment owners have made in your business.

In Conclusion

Double-entry accounting requires the use of the accounting equation. With this formula, you can ensure that your business’s balance sheet is, in fact, balanced. The accounting equation consists of assets = liabilities + owner’s equity. Adding up your business’s liabilities and owner’s equity should yield its total assets. When using the double-entry accounting method, you should take advantage of the accounting equation to ensure that your business’s balance sheet is balanced.

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