Top 7 Most Common Bookkeeping Mistakes Made

Top 7 Bookkeeping Mistakes Made

This is Part 8 in our “All About Bookkeeping” series.

If you missed our first seven articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Is Cash and Accrual Accounting?

What Is An Income Statement vs Balance Sheet?

How Do I Read An Income Statement and Why Is It Important?

How Do I Read A Balance Sheet and Why Is It Important?

What is the Statement of Cash Flows? Any Other Important Financial Statements?

As you can see we have covered a lot of ground in this “All About Bookkeeping” series. To finish it up we have something that I think is extremely important, understanding and realizing the common mistakes business owners make, so you can avoid them!

Before getting into that, I want to forewarn you. I could do articles on bookkeeping mistakes to make up years worth of content. That would be painful for both you and me so my goal here is to give you a glimpse of some of the most common or top mistakes that we see and want you to be ware of.

Mistake # 1

Not doing bookkeeping on a regular basis and not reading and analyzing your financials.

  • Do regular bookkeeping on at least a monthly basis. Continually putting it off causes you stress, anxiety, and a higher likelihood of mistakes.
  • By doing bookkeeping on a regular basis you now have data available to you that you can use to improve your business. Too many business owners do the bookkeeping but then never analyze their financials. You put the time or money in, utilize the information to help both you and your business succeed.
  • As part of our bookkeeping services we include a video with our client’s financials to walk them through what is going on and help them better understand.

Mistake # 2

Incorrect categorizing or over categorizing transactions.

  • Rushing through and coding transactions to the incorrect account. Example: you might have a rent payment in consulting expense.
  • Be sure you are paying attention and putting transactions in a category that makes sense.
  • Having too many categories can also be confusing and cause a mess. Example: client comes to us with the following expense items: Travel Meals, Travel Hotel, Travel Cab, Travel Air, etc. As you can imagine this is often times more detailed than necessary. Don’t get me wrong, it may make sense for some business but for the majority of small businesses, a simple travel category with all those items combined would be fine.
  • Having too many categories creates unnecessarily long financial statements, often times unreadable or not valuable. For example, seeing $45 for the year in “Travel – Cab” does not provide much value but rather more clutter when it could be wrapped into Travel.

Mistake # 3

Failing to keep receipts for purchases.

  • How many times have you looked at your bank statement and saw a charge wondering what it was for? Having a receipt will make that easy for you.
  • Not only does it help with coding your transactions but it backs up your expenses in the event of an audit.
  • On each receipt write on it: who, what, where, when why, and how much. The more the better should you have questions about it down the road or need to prove business purpose to the IRS.

Mistake # 4

Recording personal items or payments to the owner as business expenses.

  • Have a separate bank account (and credit card, if necessary) that is specific to your business. Run only business expenses through this.
  • If you accidentally pay for something personal on the business account, record it as an owners draw.
  • If you accidentally pay for something business related on your personal account, reimburse yourself from the business with a recording of what it is for.
  • Non-payroll payments to you as the owner generally should be recorded as owner draws (NOT expenses).
  • If you are setup as pass through entity, personal tax payments or estimates you make from the business account are NOT expenses, instead owner draws.

Mistake # 5

Incorrectly recording major purchases and potential corresponding loans with those purchases.

  • If you purchase a major item for your business (Ex: vehicle, machinery, office equipment, usually anything asset over $2,500) these should be recorded on the balance sheet, NOT in an expense account.
  • You take the expense for it through depreciation.
  • If you have any type of loan, that should be recorded as a liability on your balance sheet (NOT income) with principal payments against the loan going to the liability and the interest portion being an expense.
  • Often times we see clients booking auto loans to an automobile expense account. This is a red flag to us. If the vehicle is owned the proper treatment would be to add an asset for the value of the vehicle with a liability for the corresponding loan amount. The payments would be applied to the loan and the expense would come through depreciation of the vehicle.

Mistake #6

Not recording payroll correctly.

  • Payroll is more than just a take-home check. There is taxes, benefits, etc.
  • Ensure that your payroll is being recorded so that it matches your payroll report from your payroll provider. If you use someone like Gusto for payroll, they integrate with most accounting software to help you with this process.
  • At year-end your payroll report should match exactly to your books with the breakdown of Wages and Salaries, Payroll Tax Expenses, Benefits, etc.

Mistake # 7

Being unfamiliar or inexperienced with the entire process.

That is it, we have made it to the end of our “All About Bookkeeping” series. As a final wrap up we are doing a panel discuss with members of our bookkeeping team on our Podcast which we will post to the blog as well once we are done.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

On A Positive Note: Growth from Stagnation

On A Positive Note- Growth from Stagnation

AUTHOR: Chris Gorman – JETRO Accountant

So many thoughts and ideas seem to pass through my head especially in these times when I am more with myself than normal.  I have locked all these thoughts in my mind’s vault to release them in some sort of pre-determined fashionable order.  They have been locked away for longer than I would have liked but I feel only inclined to speak or share my thoughts on a matter when I can speak with my own truth.  I can’t write with authority on a matter or idea when I am not entirely at peace with it and so after only one blog piece, I found myself “stuck”.

So often and with ease I have found myself in this same place of stagnation with either a thought or an idea or an ever growing to-do list.  Intrinsically I know that the only way to move forward it to take action but more often than not I feel paralyzed.

I also know that personal growth can only happen when one endures a challenge and as per a quote that I stumbled upon: “We cannot become what we want to be by remaining what we are” – Max DePree.

“We cannot become what we want to be by remaining what we are” – Max DePree.

In my quest for “release from stagnation” and personal “growth”, I started a couple years ago on a journey to fill my thoughts with the positive in an effort to smother as much negative as I could.  To do this I turned to either the tangible book, audible, or podcast.

I highly recommend finding an inspirational audible or podcast and listen to it on an early morning walk before your thoughts become stifled with the challenges and mental preparing for the day ahead.   Listening to an audible or podcast can be a welcome distraction…. but choose your source wisely. 

On a fluke I found “Wake Up and Live” by Dorthea Brande Original Classic Version on “Audible”.  There are a few variations, I have learned, of this book as the original was published in 1936! 

When I read the synopsis of the book, I thought the book would be good for a laugh, I mean we are much savvier now then we were in 1936.  Somehow I had the notion that all the stresses and personal uncertainty we face is somehow a “modern” problem but as I listened further,  the “us” of 1936 struggled with many of the same dilemmas and the ideas suggested to help are eerily akin to the “breakthrough” thoughts suggested in the personal growth literature of today.

..the “us” of 1936 struggled with many of the same dilemmas..

Below is an excerpt that I found inspirational and that needs to be shared. I was unable to find the text readily available and as this is the “original classic version” it varies from the text I found online so the below is what I was able to transcribe from the audible.  It may not be verbatim but is written as I heard it.

I have to share this or at least transcribe the excerpt before I can continue with listening to the audible. Rewinding is a nuisance, and in life it seems that if a process is too much of a nuisance it is usually abandoned for the more convenient and then all too often forgotten.  Sad but true.

I guess you can say that if I don’t share this, and right now, then I will remain stagnant on a couple levels. 

My challenge for you is to read the except below and then read it again.  I will leave you to your own interpretation and personal application.

The reference source is Chapter 5: Righting the Direction from “Wake Up and Live” by Dorthea Brande Original Classic Version:

“Often I have thought of this matter of desire and suggestion in connection with the planting of vegetable or flower seeds. Once the soil is prepared and the tiny seeds are placed in it, it is but a short time when they put forth roots and sprouts begin to appear. 

 

The moment they start upward through the soil in search of light, sunshine, and moisture, obstacles mean nothing to them.  They will push aside small stones or bits of wood and if they can’t do that, they’ll extend themselves and grow around them. They are determined to emerge from the ground.  They blossom and give forth fruit, vegetables, or flowers and they succeed unless some greater force destroys them. 

 

While we are not aware of the details of Nature’s secrets, we observe the seed for a long time in the dark gradually expanding and exerting itself until it becomes a thing of beauty or usefulness.  Cultivate it, attend it, give it sunshine and water and it grows into a full life. 

 

Remember it always produces after its kind be it single or hybrid.  So, with you and the suggestions you impart to your subconscious mind. 

 

The result will be pure or complex depending upon the original seed and the attention in which you give it. 

 

In other words, plant the right kind of seed, thought of a pure strain, and habitually feed it with strong affirmative thought, always directed towards the same end, and it will grow into a mighty force finding ways and means of overcoming all obstacles. 

 

It will reach forth with its roots to find more food on which to grow and expand its foliage to gather more sunshine.”

If we're growing, we're always going to be out of our comfort zone.

What is the Statement of Cash Flows? Any Other Important Financial Statements?

What is the Statement of Cash Flows- Any Other Important Financial Statements-I Read A Balance Sheet and Why Is It Important?

This is Part 7 in our “All About Bookkeeping” series.

If you missed our first six articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Is Cash and Accrual Accounting?

What Is An Income Statement vs Balance Sheet?

How Do I Read An Income Statement and Why Is It Important?

How Do I Read A Balance Sheet and Why Is It Important?

We have covered a lot during the past few weeks in our All About Bookkeeping series. The past two weeks we have talked about the Income Statement and Balance Sheet. The final major financial statement that goes along with those two is the Statement of Cash Flows, which we will be discussing today.

1. What Is a Statement of Cash Flows?

Shows you how much cash is entering and leaving your business.

  • Remember: When we were discussing Income Statements and Balance Sheets we said, “when you spend money it does not necessarily always go to your income statement and reduce profit.” As an example: if you take an owners draw, that is not an expense on the income statement, rather an entry to owners draw on your balance sheet.
  • This can sometimes be confusing to business owners because an income statement does not necessarily give you a clear cash picture and neither does a balance sheet because when money leaves your account in could be on either or of those statements.
  • In comes the Statement of Cash Flows or Cash Flow Statement – This gives you a report of all the money coming into and leaving your bank account, regardless of whether it hits the income statement OR balance sheet.

2. What Are the Different Parts of a Statement of Cash Flows?

Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities

  • Cash Flow from Operating Activities: This area represents the incoming and outgoing money related to your every day business operations.
    • For most of our clients this is where the majority of the activity presides. As an example, for an attorney this would be where items related to fees collected, advertising expense, client costs, rent, wages, etc. would be recorded.
  • Cash Flow from Investing Activities: This area represents the incoming and outgoing money related to investments your business makes (think equipment, other companies, etc).
    • Think of this as a fitness studio, you go and spend $80k on workout equipment. This is where that would be recorded. Typically these are investments or asset purchases.
  • Cash Flow from Financing Activities: This area represents the incoming and outgoing money related to financing your business (loans, owner’s contributions or draws, etc).
    • Any loan activity would be recorded is this section along with contributions that you make as the owner or draws that you take for personal use from the business.
  • Why is the Statement of Cash Flows Important?
    • It provides you a clear cash picture. Often times we have clients come to us that say, there is no money in the bank, how can I be showing a profit of $80k. When we dig into that we can look at specific things like loan payments or owner draws that do not reduce profit but it is still cash out the door.  Example: Profit $80k but pay out $60k against a loan and take a $20k draw for personal items. You still have $80k in profit (since those items do not reduce profit) but no money left over. A statement of cash flows can make this clear for you.

3. What Financial Statements are Important to Small Businesses?

As we’ve discussed the 3 most important are: Income Statement (Profit and Loss), Balance Sheet, and Statement of Cash Flows – But, what else is out there?

  • Countless Reporting Options: With most accounting software, there are endless options of reporting. Outside of the “big 3”, most other financial statements use will depend on the type of business you have and what data points you need to get out.
  • Examples:
    • Aged Receivables or Payable
    • Income or Expense by Contact/Payee/Customer/Vender
    • Sales Tax Report
    • Bank Reconciliation Summary
    • General Ledger
    • Journal Report
    • Trial Balance
    • and so many more!

Alright, so we have covered a lot the past six weeks. This was the final major item to round out the financial statements and core of bookkeeping.

Next we will be discussing some common bookkeeping mistakes along with having a panel discussion with members of our bookkeeping team. If you have any questions, be sure to submit them to us!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Do I Read A Balance Sheet and Why Is It Important?

How Do I Read A Balance Sheet and Why Is It Important?

This is Part 6 in our “All About Bookkeeping” series.

If you missed our first four articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Is Cash and Accrual Accounting?

What Is An Income Statement vs Balance Sheet?

How Do I Read An Income Statement and Why Is It Important?

Last week we discussed the Income Statement (AKA Profit and Loss), now we are going to dive into its counterpart, the Balance Sheet.

1. What Is a Balance Sheet Recap?

Shows the financial condition of your business on a specific date in time.

  • Account Types: Assets, Liabilities, and Equity
  • Time Frame: One specific date in time
  • What Does the Balance Sheet Tell You? What you own, what you owe, and what’s left over

2. What Are the Different Parts of A Balance Sheet?

Assets, Liabilities, and Equity

SAMPLE BALANCE SHEETBalance Sheet Example

  • Assets: This area represents the things you own. This can include: cash on hand (checking accounts, savings account), office equipment, accounts receivable (what others owe you), investments, machinery, inventory, etc.
  • Liabilities: This area represents what you owe. This can include: credit cards, accounts payable (people you owe), loans, sales tax still owed, employee benefits, etc.
  • Equity: This area shows what you have invested or what’s left over. This can include: current year earnings, owners contribution (money you put into the business), owners draw (money you took out of the business), retained earnings (profit you have earned over the years less distributions), etc.
  • Remember Accounting Equation: Assets = Liabilities + Equity
  • Short-Term vs Long-Term
    • Short-Term (AKA Current): You can have both short-term assets or liabilities. Typically items classified as short-term are a year or less.
    • Long-Term (AKA Non-Current): Again you can have both long-term assets or liabilities and this typically means holding for more than a year.
    • Example: You purchase $10,000 in office furniture and take out a 6 month loan. You would book that initial purchase as a Non-Current Assets for the office furniutre along with a short-term or current liability since you expect to pay the loan off in less than a year.

3. Why Is A Balance Sheet Important? What Can I Do With the Information From a Balance Sheet?

It is important to not just complete bookkeeping and then move on, but to actually take the data that comes from the bookkeeping, including the balance sheet and utilize that to see the health of your business!

  • Get a Full Understanding of the Health of Your Business: You cannot tell how well your business is doing simply by looking at the income statement. The balance sheet will give you deep insights as to how liquid you are. If you were to shut the door today, where would you be? Would you have money left over? Would you owe money to others? If another pandemic or other industry disaster hits, how long can you business survive with revenues at 50% or less?
  • Utilize Comparative Periods: It is best to compare periods to prior periods. This can help show how you are progressing over time. Are the things you own getting bigger and things you owe getting smaller? Are you paying loans off or bringing more on?
  • Utilize Ratios: There are so many different ratios you can run but basically you can utilize them to see your performance and health. Examples are:
    • Current Ratio: Current Assets / Current Liabilities : Can your business pay its debts? The higher the ratio the better.
    • Quick Ratio: (Current Assets – Inventories – Prepaid Items) / Current Liabilities : This ratio basically tells you how capable you are to pay off your short-term liabilities with basic cash and cash equivalents.
    • Debt-to-Equity Ratio: Liablities / Shareholders Equity : This ratio tells you how much your business depends on debt to continue vs equity (current opeartions/owners). In this one you are looking for a lower number. The higher it gets the more it tells you that you if you had to pay back your debt it would likely use up your earnings/cash flow.
  • Analyze and Consult: You want to be sure to have a good grasp on your balance sheet. For clients doing their own bookkeeping, this is where we see the most errors. Making a profit is no doubt important, however just as important is understanding what you own and who you owe. If you are looking to make an investment into a piece of equipment or marketing plan you will want to analyze your balance sheet to ensure you can take on additional debt (if needed). For some simpler businesses the ratios may not mean as much but they can still help get a full financial picture and come in handy in the event of a sale. If you feel like you are flying by the seat of your pants when it comes to assets, loans, etc, do not be afraid to reach out to someone that can reel that in for you.

4. Final Items Related to the Balance Sheet

Some additional things to consider.

  • Accrual vs Cash: Remember in a previous article we discussed cash vs accrual accounting. You can run a balance sheet using both methods. As a refresher, cash basis is when you record activity as cash is interchanged. On an accrual basis you report activity as it occurs (regardless of when money is received or spent). Therefore if you run a cash basis balance sheet you will see no accounts receivable or accounts payable.
  • Asset Purchases/Depreciation: Major asset purchases go to the balance sheet and then they are depreciated which is when they move to the income statement and you get the actual expense. This is often something that happens during tax season. Lets say you purchase a new truck for $50k you will book that initially to the balance sheet as an asset. Then, depending on the depreciation method you you will expense it over time, taking depreciation expense (income statement) and offsetting the asset with accumulated depreciation (balance sheet, asset section). The value for that truck on the balance sheet will be the original asset less accumulated depreciation.
  • Owner Draws/Distributions: If you are taking money from the business as an owner that is not processed through payroll, generally this would be considered an owners draw, distribution or dividend and this it NOT an expense to the business, instead it shows on the balance sheet in the equity section. Same as when you contribute money to the business, this is not income to the business instead it would be an owners contribution.
  • Loans: When you take out a business loan that goes directly to the balance sheet as a liability item. Then when you make payments against that loan it will reduce the balance of that loan on the balance sheet and the interest portion of payments will be the only thing to hit the income statement.  
  • Simple Balance Sheet Example
    • 1) Open a bank account with $1,000 you put in of your own money.
    • 2) Take a loan out to buy a $7,000 piece of equipment.
    • 3) Receive income of $15,000 and spend $5,000 in expenses, profiting $10,000
    • 4) You take $2,000 out of the business to cover personal expenses.
    • Effect on Balance Sheet:
      • Assets: $16,000
        • Cash: $1,000 (1) + $15,000 (3) – $5,000 (3) – $2,000 (4) = $9,000
        • Equipment: $7,000 (2)
      • Liabilities: $7,000
        • Loan Payable: $7,000 (2)
      • Equity: $9,000
        • Owners Contribution: $1,000 (1)
        • Owners Draw: ($2,000) (4)
        • Current Year Earnings: $10,000 (3)
      • Note: Assets ($16k) = Liabilities ($7k) + Equity ($9k)

This article was meant to give you a deeper look into the balance. Next week we are going to be diving into some final financial statements that you may run into.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Do I Read An Income Statement and Why Is It Important?

How Do I Read An Income Statement and Why Is It Important?

This is Part 5 in our “All About Bookkeeping” series.

If you missed our first four articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Is Cash and Accrual Accounting?

What Is An Income Statement vs Balance Sheet?

Now we get to start diving into the financial statements. First we are going to talk about the Income Statement or Profit and Loss.

1. What Is a Income Statement (also known as Profit and Loss) Recap?

Shows you how profitable your business is over a period of time.

  • Account Types: Revenue and Expenses
  • Time Frame: Any period you would like, however typically: monthly, quarterly, or annually.
  • What Does the Income Statement Tell You? How much money you made, how much money you spent, profitability of your business

2. What Are the Different Parts of An Income Statement?

Income, Cost of Goods Sold, Gross Profit, Operating Expenses, Opearting Income, Non-Operating Activity, and Net Income

SAMPLE INCOME STATEMENTIncome Statement - Demo Company

  • Income or Revenue: This area represents your earnings or sales of the business. You can have multiple line items so lets say you have a service but also sell some product, you could break those out but either way it would all be located in that income or revenue section. If you have refunds, returns or discounts, they can often times be found here too.
  • Cost of Goods Sold or Cost of Sales: Many call this COGS for short. This represents the price you pay to create your product or service. These are items that would be directly related to the revenue that comes in and NOT just normal operating costs. These are costs that are directly tied to the sales and would not occur if you did not have sales. Example: Lets say you are an electrician and purchase cable wire for a job you are working on, this would be a COGS item.
  • Gross Profit: This is simply a calculation of Income or Revenue less Cost of Goods Sold. Essentially it is your income for your business before factoring in the other opearting expenses.
  • Operating Expenses: These are all of the other indirect costs associated with running your business. Examples include Advertising, Automobile Expenses, Consulting & Accounting, Meals, Office Expenses, Rent, Repairs and Maintenance, Utilities, etc. You will have a good bulk of your expenses in this section. There are a few types of operating expenses:
    • Fixed Expenses: These are the same every month or period. Examples could be rent or certain software subscriptions.
    • Variable Expenses: These are items that can change from month to month. Examples could be advertising costs or meals.
  • Operating Income: This again is simply a calculation of Gross Profit less Operating Expenses. This is essentially the income (or loss) from your business before factoring in non-operating related items.
  • Non Operating Income or Expenses: This would include things that do not play into the normal day-to-day operations of the company. This could include interest income, interest expense, income tax expense, etc. If you have significant items in this area it is nice to separate these out so that can get more clarity from your financials.
  • Net Income (or Profit/Loss): This is the final stopping point that factors in everything we discussed to come to your “bottom line”, whether your business had a profit or a loss.
  • Simply Way To Think About Income Statement: You start at the top and it starts with a positive number, your sales/revenue. As you go down your Income Statement there were will various types of negative numbers or expenses that are cutting against your sales. Finally at the bottom you will see what your profit was after factoring in the income you received and expenses you paid.

3. Why Is An Income Statement Important? What Can I Do With the Information From a Profit and Loss?

It is important to not just complete bookkeeping and then move on, but to actually take the data that comes from the bookkeeping, including the income statement and utilize that to cut costs and grow your business!

  • Think Deeper Than Just Net Profit: So many business owners we talk to think only about profit. While this is an important number it is just as important to dig deeper than that.
    • Sales/Revenue: Look at this area, is this number dropping? Why is it dropping? Has it been increasing, how do we continue that? What can we do to increase this on an on-going basis?
    • Cost of Goods Sold: Are we paying too much for our product? If we buy in bulk can we get a deal?
    • Operating Expenses: Are we still utilizing these items? Are we paying too much for anything? Have we shopped insurance or cell carries? Are these expenses all necessary? How are we trending here?
    • Non-Operating Activity: Can we move our savings to a CD to gain more interest income? Can we refinance to lower interest?
  • Utilize Comparative Periods: It is best to compare periods to prior periods. This can help spot areas for savings or ideas for future growth. Put a marketing plan together in Q1, how did that change sales in Q2? How are your sales compared to last year?
  • Create Forecasts / Projections: Prior data is great to see performance in the past and see where cost cutting opportunities exist. However, you have to take actions on prior data because your business is moving forward. Using this data we have we can easily create future projections and forecasts or budgets. We can take a month by month income statement and have a general idea of trends that we can predict into the future. This can help you be better prepared and plan for things that matter in your business.
  • Plan / Consult / Execute: Simply put, USE THIS INFORMATION. Income statements and financials can be so valuable for the growth and future of your business but if you just let it sit on the table it doesn’t do much good. Use the information to plan for the future to plan on ways to cut costs or  increase revenue. If you are unsure in certain areas, consult someone to help you on this journey. Finally take what you’ve learned and execute. Too often business owners get wrapped up in the day-to-day and their business goes stagnant. Execute to grow your business and reach the goals you want.

4. Final Items Related to the Income Statement

Some additional things to consider.

  • Accrual vs Cash: Remember in a previous article we discussed cash vs accrual accounting. You can run an income statement using both methods. As a refresher, cash basis is you record income as it is received and expenses as they are paid. On an accrual basis you report income as it is earned and expenses in the period they are associated with (regardless of when money is received or spent).
  • Asset Purchases/Depreciation: Last week we discussed that major asset purchases go to the balance sheet and then they are depreciated which is when they come to the income statement. This is often something that happens during tax season. Make sure you understand this throughout the year. You may have bought a new business vehicle for $50k but depending on the depreciation method you may not expense that all in year 1, instead it may be depreciated across multiple years. It will not show up on the income statement until actually depreciated since the initial purchase is booked to the balance sheet.
  • Owner Draws/Distributions: If you are taking money from the business as an owner that is not processed through payroll, generally this would be considered an owners draw, distribution or dividend and this it NOT an expense to the business, instead it is also a balance sheet item.
  • Loans: The only loan related items on the income statement would be the interest portion. Incoming loans and outgoing loan payments are balance sheet items, not sales or expenses.

This article was meant to give you a deeper look into the income statement (profit and loss). Next week we are going to be diving into the balance sheet with coincides with the income statement in reporting.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

What Is An Income Statement vs Balance Sheet?

Income Statement vs Balance Sheet

This is Part 4 in our “All About Bookkeeping” series.

If you missed our first three articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Is Cash and Accrual Accounting?

Now that we have a solid foundation of what bookkeeping is and the basics on debts, credits, cash vs accrual, and the chart of accounts, lets talk about the two most popular financial statements, the income statement and balance sheet.

These two statements are the core of your financials and the very first output you typically will get from your bookkeeper.

1. What Is a Income Statement (also known as Profit and Loss)?

Shows you how profitable your business is over a period of time.

  • Common Accounts: An income statement contains all your sales (revenue) and expenses. These can include but are not limited to: Sales, Cost of Goods Sold, Bank Service Charges, Contact Labor, Consulting, Travel, Wages & Salaries, etc.
  • Time Frame: Any period you would like, however typically: monthly, quarterly, or annually.
  • What Does the Income Statement Tell You?
    • How much money you made
    • How much money you spent
    • Profitability of your business
  • Format
    • Start with Revenue
    • Next Record Cost of Goods Sold
    • Next Record Operating Expenses
    • End with Profit or Loss

2. What Is a Balance Sheet?

Shows the financial condition of your business on a specific date in time.

  • Common Accounts: A balance sheet contains assets, liabilities, and equity accounts. These can include but are not limited to: Checking Account, Furniture, Equipment, Credit Cards, Loan Payable, Owners Contribution, Owners Draw, Current Year Income (or Loss), etc.
  • Time Frame: A balance sheet is always one specific date in time. For example, you could create a balance sheet as of September 30th and it will very likely be different if you use October 1st the next time you run it. That is because it is a snapshot at a specific point in time.
  • What Does the Balance Sheet Tell You?
    • What You Own
    • What You Owe
    • What’s Left Over
  • Format
    • Start with Assets
    • Next You List Liabilities
    • Finally You Have Equity
    • Remember Accounting Equation: Assets = Liabilities + Equity

3. Differences Between Income Statement and Balance Sheet

It is important to know the difference between the two because this can often be confusing for business owners.

  • Know Whether It Hits Income Statement or Balance Sheet – When you spend money it does not necessarily always go to your income statement and reduce profit.
    • Asset Purchase: If you purchase a $10,000 piece of equipment you would not deduct it on the income statement right away. Instead you would add it to your balance sheet as an asset and then expense it over time via depreciation which is when you get the actual expense for it.
    • Loan: If you have a loan you only deduct your interest expense, principal payments are not deductible and simply lower your loan payable on your balance sheet. On that same not when you received the loan money it is not considered income, instead it would just increase your loan payable amount on your books.
    • Owners Contribution or Owners Draw: When you contribute personal money into the business that is not included as income to the business, instead it is recorded as an owners contribution. In the same note when you withdrawal money as an owners draw or distribution, that is not an expense to the business.
    • Normal Income and Operating Expenses: These are the items that hit the income statement and factor into your profit or loss which in the end is what you pay taxes on.

This article was meant to give you a deeper look into two major financial statements for every business. In the next couple articles are going to dig into each financial statement a little deeper to give you a better understanding of each.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

What Is Cash and Accrual Accounting?

Cash vs Accrual

This is Part 3 in our “All About Bookkeeping” series.

If you missed our first two articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

Before we dig into the good stuff, financial statements, we want to discuss two types of reporting, cash vs accrual.

1. What Is Cash Basis Accounting/Bookkeeping?

Recognize revenue and expenses when cash comes or leaves your account.

  • Basic Understanding: Recognize revenue when you receive cash in your account. Recognize expenses when cash leaves your account. Example: Deposit a check for April services in May, you would report that income in May (when deposited). Or, pay a contractor in June for work they did in May, that would be considered an expense in June (when paid).
  • Accounts Receivable and Accounts Payable: Not recognized on a cash basis. So, if you were to have provided services for a client in May but it is outstanding, you will not recognize income until actually paid.
  • Benefits to Cash Basis
    • Easier to Maintain
    • Easy to Understand
    • You have a better idea on money available to spend
    • Income not taxed until it hits the actual bank
  • Downfalls to Cash Basis
    • Reporting may be less reliable (Ex: Big deposit in one month with a lot of expenses at a later time)
    • Less insights into invoices outstanding or bills needing to be paid

2. What Is Accrual Basis Accounting/Bookkeeping?

Recognize revenue and expenses when earned.

  • Basic Understanding: Recognize revenue when it is earned, regardless of when it is received. Recognize expenses in the period they are related to, regardless of when it is paid. Example: Provide services for a client for the month of April, you would report income in April even if you do not actually receive payment until May. Or you have a contractor that did work for you in May you would record that expense in May even if you did not pay until June.
  • Accounts Receivable and Accounts Payable: You will utilize to properly record income and expenses in the period they are earned. As you provide services or sell a product you will create an invoice (accounts receivable) to match that to the period in which you performed those services or sold that product. Once you are paid it will clear your outstanding invoice but the income would have already been recorded. Same thing with expenses, if you have a utility bill for a month you will enter that as a bill (accounts payable) in the month its related to. Once you pay that bill it will clear out your accounts payable.
  • Benefits to Accrual Basis
    • More reliable reporting (Income and expenses match to the same period)
    • Clearer financial picture
  • Downfalls to Accrual Basis
    • Harder to Maintain
    • Hard to Understand
    • Doesn’t match cash activity
    • Taxed on income not yet received

3. Should I Use Cash or Accrual Basis?

It Depends… You can potentially do both as well!

  • There is no straight answer as to which option is best for your business. You will want to talk to your accountant. With that being said we want to outline some typical guidelines we discuss with clients.
  • Cash Basis Best For:
    • Smaller Businesses
    • No Inventory
    • Service Based Businesses
  • Accrual Basis Best For:
    • Bigger Businesses
    • Businesses w/ Inventory
    • Shareholders/Investors
    • Complex
  • Hybrid/Combo
    • Most accounting software allows you to switch between cash and accrual accounting. So you have the ability to run on a cash basis but still track accounts receivable and accounts payable for internal purposes so you are keeping track of outstanding items.

4. Example / Walk Through

Lets put the learning into perspective!

  • Facts
    • Send invoice for $10,000 for services in August
    • Receive a bill for $2,500 for contractor fees for August
    • Pay $500 for bill related to July in August
    • Receive partial cash payment of $6,000 for invoice in August and remaining  $4,000 in September
    • Pay bill for contractor in September
  • Cash Basis Profit/Loss
    • July: $0
    • August: $5,500 Profit ($6,000 – $500)
    • September: $1,500 Profit ($4,000 – $2,500)
  • Accrual Basis Profit/Loss:
    • July: $500 Loss
    • August: $7,500 Profit ($10,000 – $2,500)
    • September: $0
  • Main Difference: Timing

We did this article prior to financial statements because your financial statements depend on which method you choose.

Now that we have an overall understanding of bookkeeping down, we can dig into the fun stuff in our next article, income statement and balance sheet!

This is just the start of our series, be sure to check back for future posts!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

This is Part 2 in our “All About Bookkeeping” series.

If you missed our first article check it out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

Now that we have a solid foundation of what bookkeeping is, we want to dig a little deeper.

What are debits and credits and why do they matter?

What is a Chart of Accounts (COA)?

Any prior knowledge you have around debits and credits (usually associated with bank accounts and credit cards) needs to be thrown out. When it comes to bookkeeping the meaning is a little different.

1. What Are Debits vs Credits?

Simply Put: Debit = Left and Credit = Right

  • T Accounts: In bookkeeping classes they always start with a “T” account. Basically you take a piece of paper and write a big “T”. If you have a debit it goes on the left side of the line in the “T” and if you have a credit it goes on the right side of the line in the “T”.
  • Every Transaction Has Both a Debit and Credit: Every transaction you have uses a minimum of two accounts, at least one account is debited and at least one account is credited. For example, if you buy a package of paper clips you will have a debit to expenses and a credit to your bank or credit card account. Total Debits Must Equal Total Credits
  • Accounts That Increase With Debits:
    • Assets
    • Expenses
    • Owner Draws
    • Consequentially these accounts decrease with credits.
  • Accounts That Increase With Credits:
    • Liabilities/Loans
    • Income
    • Owner Contributions
    • Consequentially these accounts decrease with debits.

2. What Is a Chart of Accounts?

A listing of the account names that every transaction can be coded to.

  • Accounts Available for Coding: As we discussed last week, a bookkeeper will take the transaction types we discussed and assign them to their respective accounts (or categories) which is what the Chart of Accounts (COA) is made up of.
  • Types of Accounts on COA:
    • Assets – Examples: Bank Account, Office Equipment, Vehicles, etc. Assets generally carry a debit balance.
    • Liabilities – Examples: Credit Card, Loan Payable, Sales Tax Payable, etc. Liabilities generally carry a credit balance.
    • Equity – Examples: Owners Contribution, Owners Draw, Current Year Profit (or Loss), etc. Equity accounts can have both debit and credit balances, depending on the account.
    • Income – Examples: Service Sales, Product Sales, Refunds, etc. Income is generally a credit.
    • Expenses – Examples: Bank Service Charges, Office Expenses, Payroll Tax Expense, Postage, Rent Expense, Wages & Salaries, etc. Expenses generally are debits.
  • Accounting Equation: Assets = Liabilities + Equity
    • As we mentioned earlier, every transaction must have both a debit and credit that will balance the equation.

3. Examples

To help better understand debits vs credit and the chart of accounts, lets go through a few examples.

  • Receive Income for Services
    • If you deposited a check for income you would debit cash (increase cash) and credit revenue (increase revenue). If we look at the accounting equation, cash is an asset and revenue is part of the equity section (P&L) which balances the equation.
  • Pay Rent
    • You write a check to pay rent, you will credit cash (decrease cash) and debit rent expense (increase rent expense).
  • Transfer Money from Business to Personal Account
    • This is an example of an owners draw. You would credit cash (decrease cash) and debit owners draw (increase owners draw).
  • As you can see with these examples, every one has an account that is debited and also an account that is credited for the same transaction. Every transaction must have both a debit and credit.
  • You’ll also notice that the accounting equation balances for each one, Assets = Liabilities + Equity

This article was meant to give you a deeper look into what bookkeeping is. Now that we have learned this part we can dig deeper into bookkeeping and financial statements which we will do in the next article!

This is just the start of our series, be sure to check back for future posts!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Is Bookkeeping?

This is Part 1 in our “All About Bookkeeping” series.

We hear from business owners often:

“What is Bookkeeping?”

“Why do I need to do bookkeeping in my business?”

Most do not understand the true value that bookkeeping can bring to your business so we are set out on a mission to explain to you through a multi part series what you need to know about bookkeeping and why it is vital in your business.

1. What Is Bookkeeping? Simplified Definition

Bookkeeping is the process of keeping track of (or recording) every financial transaction within your business. This is then used to create financial statements. Every business needs bookkeeping.

Types of Transactions:

  • Bank and Credit Card Transactions: Every transaction (spend money or receive money) that goes through your bank account or credit card needs to be assigned to an account or category. Ex: $150 credit card transaction to Apple for a new keyboard would increase your credit card balance and increase your office expense account.
  • Invoices: Although not required to complete bookkeeping, many businesses send invoices to their clients to ensure they get paid. Ex: Client XYZ owes you $500 for services, you would create an invoice for $500 and send that to XYZ.
  • Bills: Although not required to complete bookkeeping, many businesses enter bills to keep track of who they owe and when it is due. Ex: You owe money for an electricity bill, payroll, or accounting services, you would create a bill to record the amount due and when it is due.
  • Non-Cash or Credit Card: This could be something like an asset purchase or a loan your business took out. Ex: You purchase a new Ford F-150 and take a loan out. You would record a new asset (vehicle) and corresponding loan related to the purchase.

2. What Is a Bookkeeper Responsible For?

Completing the bookkeeping process (transaction recording) to create financials that can be used to help the business.

  • Gather Supporting Documents: A bookkeeper will often gather necessary supporting documents for business transactions. This could include: bills, invoices, receipts, purchase orders, statements, etc.
  • Record/Classify Transactions: A bookkeeper will take the transaction types listed above and assign them to their respective accounts (or categories) and record them in the bookkeeping software.
  • Reconcile Accounts: Once the recording is done the bookkeeper will complete a reconciliation. A reconciliation is basically just taking the data that was recorded and ensure it matches the actual balances. Think of it like a check book. You need to ensure that the balance you have recorded in the “books” matches the actual bank, credit card or loan statement/balance. If they do not match that indicates something may have been missed or entered wrong.
  • Create Financial Statements: Finally, based on the activity recorded and reconciled we can create financial statements that can be used to help your business. Type of financial statements include: Income Statement (Profit & Loss), Balance Sheet, Statement of Cash Flows, and more.

3. Why Do I Need Bookkeeping?

I could go on for days on why every business NEEDS bookkeeping but here are some of the major items to consider.

  • Ensure Correct/Accurate Tax Filings: Tax time does not need to be stressful!
  • Clarity: Helps you understand how your business is performing. Judging performance simply by cash in the bank is the wrong way to do it.
  • Track Profit (or Loss) and Liabilities Outstanding
  • Cash Flow Assistance
  • Cost Cutting: With so much activity going on within your business there may be items that are unnecessary or setup on recurring terms. Bookkeeping helps you analyze that and see where you can cut costs.
  • Better Decision Making
  • Easy Reporting to Investors/Bankers (or other third parties)
  • Peace of Mind: Breathe easy knowing you’re doing things the right way and have good record keeping of everything going on within your business.
  • Avoid/Win An Audit

Earlier this year we did an article on the Top 4 Bookkeeping Rules to Follow. Be sure to check out that article (and Podcast episode) for more information there.

This is just the start of our series, be sure to check back for future posts!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

On A Positive Note: A Grand Perspective

On A Positive Note: A Grand Perspective

AUTHOR: Chris Gorman – JETRO Accountant

This idea came without much personal forethought…

During our JETRO annual retreat (held virtually this year) we toss around ideas to help inspire our clients or help inspire us!  My idea was to provide a blog or writings that would help with motivation or productivity or positivity or a combination of all three.  Due to the current climate all three attributes are in high demand but low supply.  Honestly when I brought up the idea I wasn’t quite prepared to be the one to launch it….

It has taken several weeks to get up the courage to put pen to paper.  Why?  Well I felt like a charlatan.  I didn’t have true positivity, or motivation and as a result wasn’t very productive, so who am I to post something pertaining to attributes I felt I sorely lacked? Well as they say, whoever “they” are, the 1st step is the hardest, so here goes.

“We all have growing to-do lists as a result of work and home life.”

How many of you feel overwhelmed?  We all have growing to-do lists as a result of work and home life.  If you are like me the “to-do” list is always longer than the “done” list.

Often times this consumes my thoughts, “what should I do next”, “how much time should I set aside for this or that task”, ”should I redo my list, my calendar”, “how will I ever get all this done and get enough sleep / time with my husband and son / time for myself”?  At times I admittingly get stuck in the thought process and ruminate on what I need to get done rather then actually putting in the time to get the work done.  It is exhausting and I am left mentally tired, with a to-do list without much crossed off, and a feeling of personal defeat. 

At JETRO we are a connected team and every Friday someone will ask “What fun things are you doing this weekend?”  I normally cringe when this is mentioned.  “Fun” things – who has time for that?  My fun will be catching up on the work I didn’t do because I was mentally stuck.  My fun will be the house work or house projects that are leftover from the prior 3 weeks / weekends..  My next thought…”ugh what is wrong with me”?

“I vowed I wouldn’t bring my computer and I would spend the time with family and the Grand Canyon..”

This year, in the midst of the craziness, we decided to take a family vacation to Flagstaff AZ.  In true form, I had my to do list of all the items I wanted to get done before vacation to have peace of mind on vacation.  I vowed I wouldn’t bring my computer and I would spend the time with family and the Grand Canyon and whatever experiences Flagstaff had to offer.

Well I fell short and my laptop came along with me…..I had just a “few” more things I had to do before I could relax…..  Afraid to admit this, but my laptop is kind of like a security blanket.  I did do a little work on the plane and the first night in Arizona, but unlike other vacations, the computer became a desk decoration. 

“…but unlike other vacations, the computer became a desk decoration.”

I put away all my to-do list thoughts, after all, what wasn’t done wasn’t earth shattering, and guess what, it would still be there to tackle after I got back.  The time that I would normally spend stuck was spent with a cup of coffee sitting on a balcony viewing the mountains in the distance, taking a walk on a trail, or…wait for it…..taking a nap!  For the first couple days I felt incredibly guilty but for the remainder I felt at peace and with each passing day I was recharging. 

“Who knew that by taking a break I was actually accomplishing something?”

Who knew that by taking a break I was actually accomplishing something?  My vacation resulted in a decluttering of my mental space and the result I came back ready to tackle things and I have been productive!

I resolved not to work on the weekends unless absolutely necessary, so today when asked what fun things are planned for the weekend, I may not have a plan but I have an intention to do something fun without guilt.

My productivity level was enhanced by letting go and taking a vacation.  Now I know that this is not feasible for all but I challenge you to take a break and do something different of something you have wanted to do for some time but felt that you couldn’t because of other more pressing obligations.  Clear your mental space and the productivity will flow. 

“My productivity level was enhanced by letting go and taking a vacation … Clear your mental space and the productivity will flow.”