General Questions

S Corp vs C Corp: What’s the Difference?

The U.S. Internal Revenue Service (IRS) recognizes several types of business entities. In addition to sole proprietorships and limited liability companies (LLCs), there are S corps and C corps. You can structure your business as either an S corp or C corp. While they are both corporation-based entities, though, they aren’t the same. What is an S corp and C corp exactly, and how do these entities differ?

What Is an S Corp?

An S corp is a corporation-based entity that passes its income to its shareholders. All corporation-based entities have shareholders. Whether you want to start an S corp or C corp, you’ll have to jump through the hoops of issuing stock and holding shareholder meetings. You don’t have to necessarily list your business on the stock market. Rather, you just need to have shareholders — even if your business is privately traded. S corps are pass-through entities, meaning shareholders are responsible for paying taxes on their business’s gains or losses.

What Is a C Corp?

A C corp is a corporation-based entity that doesn’t pass its income to its shareholders. C corps still have shareholders, and they must perform many of the same stock-related tasks as their S corp counterparts. But C corps themselves must pay taxes. C corps aren’t pass-through entities. Their shareholders must pay taxes on dividends, and the C corps themselves must pay taxes on their income.

Differences Between S Corps and C Corps

The main difference between S corps and C corps is that the former is a pass-through entity, whereas the latter is not. S corps are classified as pass-through entities because their taxes are passed down to their shareholders. C corps use a different form of taxation known as double taxation. With double taxation, both the shareholders and the C corps themselves pay taxes.

Another difference between S corps and C corps involves stock. S corps only have a single class of stock. C corps, in comparison, support multiple types of stock. If you operate a C corp, you can create different classes of stock with different levels of voting rights for shareholders.

S corps are more common than C corps among small businesses. Only businesses with more than 100 shareholders are eligible for the C corp status. S corps, in comparison, are limited to 100 shareholders. Since small businesses typically have fewer shareholders, most of them operate as an S corp, instead.

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How Units of Measure Work in QuickBooks

Have you come across units of measure in QuickBooks? The popular accounting software supports units of measure. Also known as U/M, it’s an optional feature that many businesses use when buying and selling products. What are units of measure exactly, and how do they work?

What Are Units of Measure?

Units of measure are metrics by which products are measured. Cleaning products and other liquid products, for instance, may use ounces as a unit of measure. Fabric, on the other hand, may use yards. With units of measure, you can specify metrics such as these for your business’s products. You can even specify different metrics for products that you purchase and products that you sell. You may purchase products from vendors using a larger metric, and you may resell them to your business’s customers using a smaller metric.

Single vs Multiple Units of Measure

You can assign units of measure using a single unit or multiple units. According to Intuit, a single unit of measure is designed for instances in which businesses only use one metric per product item. In comparison, multiple units of measures is designed for instances in which businesses purchase and resell product items in different metrics (as explained above).

Creating Units of Measure: What You Should Know

When creating units of measure, you’ll need to specify a base unit. All units of measure require a base unit. It’s the smallest possible metric for a given unit of measure. QuickBooks uses base units to count inventory, generate reports, track quantities and more.

In addition to base units, there are related units. Related units are exactly what they sound like: metrics that are related to one or more other metrics. With related units, you can show products in different metrics. Rather than only showing fabric in yards, for example, you can show it in feet and yards.

If you want to create units of measure, you’ll need to enable this feature. In QuickBooks Desktop, units of measure is available by clicking the “Edit” menu and selecting “Preferences.” Next, select the “Items & Inventory” menu and navigate to the “Company Preferences” tab. You should see a section labeled “Units of Measure.” Click the “Enable” link in this section, at which point units of measure will be turned on for your account.

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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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What Is a Roth IRA and How Does It Work?

If you’ve been reluctant to start saving for retirement, you may want to open a Roth IRA. A recent survey found that only 17% of Americans view saving for retirement as a top priority. Most Americans either haven’t started saving for retirement, or they simply don’t prioritize this task. If this sounds familiar, you may want to open a Roth IRA. It will give you a head-start on retirement.

The Basics of a Roth IRA

A Roth IRA is a type of individual retirement account that allows you to save after-tax dollars for your retirement. After-tax dollars, of course, is money that you’ve earned and have already paid taxes on.

Many employers offer Roth IRAs for their employees. Some of them may match their employees’ contributions. If you deposit $5,000 into your employer-sponsored Roth IRA, for instance, the employer may match it by depositing another $5,000. Even if your employer doesn’t offer Roth IRAs, though, you can still open one of these retirement accounts.

Roth IRA vs Other Retirement Accounts

There are other types of retirement accounts. With a Roth IRA, though, you can take advantage of tax-savings benefits. You won’t have to pay taxes on the growth earnings of your Roth IRA contributions.

You can use your Roth IRA contributions to invest in stocks, mutual funds or other investment securities. As the value of these investments increases, so will the value of your Roth IRA. While other types of retirement accounts may require you to pay taxes on these growth earnings, Roth IRAs do not

You can also withdraw funds from your Roth IRA after age 59 and ½ without incurring any penalties, assuming your Roth IRA has been active for at least five years.

How a Roth IRA Works

A Roth IRA works like most other retirement accounts but with some caveats. It’s a type of personal or individual retirement account that allows you to contribute after-tax dollars while taking advantage of certain tax-savings benefits.

There are limits to Roth IRAs, however. When filing your taxes as single or married filing separately, you can only contribute $6,000 to $7,000 to your Roth IRA per year, assuming your income is less than $129,000 (rules for 2022 income, which may change from year to year).

Regardless, opening a Roth IRA is a great way to start saving for retirement. You won’t have to pay taxes on the growth earnings of your contributions, and you can even withdraw funds from your Roth IRA without incurring penalties once you’ve reached a certain age.

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What Is Bad Debt and How Do You Prevent It?

When running a business, you should stay on top of accounts receivable. Accounts receivable, of course, consists of debt that you must collect from customers. You may sell a product or service to a customer, but if you allow the customer to pay at a later date, you’ll have to collect the payment. Failure to do so could result in bad debt.

The Basics of Bad Debt

Bad debt is any debt that is deemed uncollectible. Customers will incur debt when they purchase your business’s products or services while agreeing to pay for them at a later date. Your business, on the other hand, will incur accounts receivables.

Accounts receivables are technically an asset. They are recorded as assets on balance sheets. But you’ll still have to collect those payments from your business’s customers. If a customer fails to pay your business by the agreed-upon due date – and you’ve determined that the debt is uncollectible – your business will have bad debt.

How to Prevent Bad Debt

There are several things you can do to prevent bad debt. Before allowing new customers to make purchases on credit, run a credit check. You can check a customer’s credit to determine his or her risk of default. If a customer had bad credit or no credit, you may want to avoid extending credit to him or her. Instead, require the customer to pay for products or services upfront to minimize the risk of bad debt.

Creating clear and transparent payment terms can help to protect your business from bad debt. Payment terms, of course, state how and when customers must pay their debt. It should mention the due date, and it should mention any fees, such as late fees. With clear payment terms, more customers will follow through with their debt obligations.

Sending invoices in a timely manner is another tip to prevent bad debt. Invoices feature an itemized list of all products or services purchased by a customer. When customers receive an invoice, they can submit payment for all of the purchased products or services. The longer you wait to send an invoice, though, the greater the risk of bad debt.

In Conclusion

Debt is considered bad if you’ve exhausted all efforts to collect it to no avail. It’s the result of customers not paying their invoices according to the terms set forth. To prevent bad debt, run a credit check on all new customers, create clear and transparent payment terms, and make sure you send invoices in a timely manner.

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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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The Importance of PCI Compliance

If your business accepts credit and debit card payments, you’ll need to comply with the Payment Card Industry (PCI) standard. In the past, it wasn’t uncommon for businesses to exclusively accept cash payments. But this is no longer the case with modern businesses. Research shows that roughly two-thirds of all transactions involve a credit or debit card. You can’t ignore PCI compliance, however, when accepting credit or debit card payments.

What Is PCI Compliance?

PCI compliance involves the implementation of safeguards that are designed to protect the privacy and information of cardholders. Cardholders are customers. If your business accepts credit and debit card payments, you’ll have to access to sensitive information. Among other things, you’ll know cardholders’ names, addresses, card numbers and more. PCI compliance is all about protecting this information by following a set of rules.

It’s Required

PCI compliance isn’t optional. Assuming your business accepts credit and debit card payments, you’ll have to comply with the PCI standard. Otherwise, you could lose your ability to accept and process card payments. All of the major card companies require businesses to comply with the PCI standard. Failure to comply with the PCI standard could result in your business losing the ability to accept and process card payments.

Protects Against Data Breaches

Another reason PCI compliance is important is that it protects against data breaches. Data breaches can strike businesses of all sizes. While some people assume that only large businesses suffer data breaches, small businesses often have higher rates of data breaches. This is because small businesses have weaker security, so they are viewed as low-hanging fruit by attackers. Regardless of your business’s size, you should comply with the PCI standard. PCI compliance will protect your business from data breaches by improving its overall security.

Preserves Reputation

To preserve your business’s reputation, you need to comply with the PCI standard. PCI compliance will protect customers’ information. Customers will be able to make credit and debit card payments without fear of having their information stolen and used for nefarious purposes. As a result, your business will maintain a positive reputation. Neglecting to comply with the PCI standard, on the other hand, could result in data breaches. Customers’ information could be exposed, in which case they may have a poorer and more negative perception of your business.

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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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