accounting isn't rocket science - piazzarosso.com isn't... · accounting isn't...

79
Accounting Isn't Rocket Science Second Edition Practical accounting for the small business owner Michael Chase, MBA

Upload: others

Post on 16-Mar-2020

12 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting

Isn't

Rocket

Science

Second Edition

Practical accounting

for the small business owner

Michael Chase, MBA

Page 2: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

ISBN 978-1-4507-1048-090000 Copyright © 2007, 2010 Michael Chase. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission of the author, except brief quotations in articles and reviews.

Page 3: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

About the author Michael Chase has worked with small business owners on accounting and related issues for more than 20 years. Michael has an MBA from Golden Gate University in San Francisco and an MS Taxation from California State University, East Bay. Website www.MChase.com Email [email protected]

Page 4: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Questions, Comments, Suggestions If you have questions or comments about the material in this book, or suggestions for changes, please send them to: [email protected]

Page 5: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Contents Introduction page 1 Accounting Primer 6 Customers and Income 10

1 – Businesses that receive payment 11 when they make a sale

2 – Businesses that invoice their customers 13

3 – Businesses that use separate software 15 for invoicing and accounts receivable Inventory 17 Vendors and Expenses 18 Payroll 23 Internal Controls 27 Financial Statements 28 Cash Flow Projection 29 Financial Reporting, Financial Review and Tax Planning 30 Business Information 32 Files 37 Petty Cash 45 Fixed Assets 46 Other Stuff 47

Mail and email

Chart of accounts

Records retention continued …

Page 6: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Forms page 50

Daily Sales and Deposits

General Journal Entry

Inventory Tally Sheet

Debit Card Disbursements

Credit Card Disbursements

Petty Cash forms

Fixed Asset forms

Guest Meal / Entertainment

Expense Report forms

Business Mileage Log forms

Independent Contractor Invoice

Page 7: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Introduction Another accounting book? Does the world really need another accounting book? Actually, no. Then why would you get this book? Because it doesn't try to teach you accounting – which you don't need to know anyway, QuickBooks has taken care of that. It's about what I call Run-Your-Business accounting. It's a practical guide that gives you easy-to-use solutions to the everyday problems of dealing with money and paperwork. It shows you how to set up an accounting system that meets your needs but doesn't divert your attention from doing business. It shows you how to get and stay organized so that managing money can help rather than interfere with doing business. It tells you what you need to do and how to do it so that you don't have to reinvent the wheel of managing money and paperwork. And if you don't do the bookkeeping / accounting for your business, you'll know what you need and how it should be done. It also gives you almost a dozen forms that make it easier to handle the money managing side of your business. The result is that you'll avoid accounting's two similarities to rocket science:

One, it's very easy to do something wrong, and,

Two, the "something wrong" can be time consuming and expensive to fix.

1 1

Page 8: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Introduction

Why do you need an accounting system? Because so much of business involves money – you need a place to keep information about money. Also, a good accounting system can make a significant contribution to your business's success. How much of a contribution? One accountant estimated that construction companies with good accounting systems were six times as profitable as those without. (Caution: Your results may vary.) What is a good accounting system? A good accounting system:

Gives the owner accurate and timely financial information about the business

Is used by the owner to see how the business is doing The business of business When you work for someone else, you spend your time doing work related to your job – if you're a carpenter you spend your time at work doing carpentry. However, when you work for yourself, your job expands to include everything the business does. Not only do you do carpentry, you also:

Find and bid on projects

Hire and manage subcontractors and employees

Negotiate with contractors, subcontractors, employees, customers and vendors

Pay vendors, subcontractors and employees

Collect from contractors and customers

Prepare tax returns for and pay taxes to federal, state and local tax authorities

Prepare information for and comply with the regulations of federal, state and local regulatory authorities

Handle all the paperwork that comes with the above

2

Page 9: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Introduction

And much, much more The business of business is all the things that are not carpentry. Accounting software and your accounting system Accounting software is great. The problem is that accounting software only does one thing: it gives you a place to hold information about your company's financial transactions – sales to customers, payments to vendors, etc. Your accounting software is just part of your accounting system. Your accounting system Your accounting system includes, in addition to accounting software:

Procedures for managing financial transactions – sales to customers, payments to vendors, etc.

Procedures for entering the information about financial transactions into your accounting software

Procedures for handling the paperwork Accounting software is easy – you buy it. Accounting procedures are a little more work – you have to develop them to meet your company's specific needs. Fortunately, most of these procedures are common to almost all businesses. You only need to customize them for your company. Accounting Isn't Rocket Science shows you the most common procedures and how to make them work for your company. What are procedures? Procedures are the accumulated wisdom of your company – they are the ways people at your company agree to do things.

3

Page 10: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Introduction

Accounting procedures and business procedures Your accounting procedures aren't separate from your business procedures. For example, your company will have a procedure for taking a customer's order – part of this procedure will be how to enter the order into your accounting software. What happens when you don't have procedures? I'm sure you've experienced what a mess things can become when someone decides they're going to do things their own way. Procedures give you a way to avoid this. Writing your procedures can make it easier to:

Get several – or many – people to agree on how to do something

Change a procedure

Train people Do you need an accountant? Absolutely! When you have a question or need advice, you need an independent advisor with years of business experience. You also need someone who knows your company and your business so he can give you an answer that is specific to your circumstances. Your accountant is that person. Your accountant should be:

A CPA – Certified Public Accountant

A CPA is licensed by your state and has years of experience helping business owners deal with tax, accounting, and financial issues.

Someone you trust and are comfortable working with

You'll have trouble taking your accountant's advice if you're not sure you trust him or are not comfortable working with him.

4

Page 11: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Introduction

5

Accounting systems and financial management The reports from accounting software tell you what happened – they look at the past. Looking into the financial future goes beyond accounting. Taken together – looking at the financial past and into the financial future – is financial management. Why do you need financial management? Because financial management gives you the tools to make informed business decisions. How much will financial management cost you? You don't want to pay for financial management you can't use. On the other hand, your accountant will tell you that one of the worst mistakes you can make is to get less financial management than you need. Your accountant can help you understand what your company's financial management needs are and the most cost-effective ways to meet them. Notes I refer to QuickBooks throughout the book because it's the accounting software used by the vast majority of small businesses. This doesn’t mean it's the right accounting software for your company. I suggest that you talk to your accountant to determine what works best for you. I've included all the forms I refer to in the book in the Forms chapter starting on page 50. You can use these forms to make your own forms. I've italicized the names of forms, files, chapters, etc. throughout the book.

Page 12: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

6

Accounting Primer It can be helpful to know a little – just a little – accounting. Accounting works as a system. An accounting system is made up of accounts. Accounts Accounting has five kinds of accounts:

Asset accounts – what the business owns

Liability accounts – what the business owes

Equity accounts – what the owners of the business own

Income accounts

Expense accounts Accounting separates these five kinds of accounts into two groups:

Balance Sheet accounts

Income Statement accounts The Balance Sheet accounts are the Asset, Liability and Equity accounts. The Income Statement Accounts are the Income and Expense accounts. Accounts are grouped this way to create accounting's two most important financial reports:

The Balance Sheet and

The Income Statement Together, the Balance Sheet and Income Statement are called financial statements.

Page 13: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Accounting Primer

7

Entering transactions into an accounting system Each account has two sides, a left side and a right side. In accounting-speak, the left side is called the debit side and the right side is called the credit side.

. Account name . Left Right Debit Credit You enter transactions into accounts. Each transactions entry consists of two entries – entering an amount into the left (debit) side of at least one account and an amount into the right (credit) side of at least one account, and the total amount of the debits must equal the total amount of the credits. In accounting-speak, the debits equal the credits. For example, if you write a check for $100 to pay for merchandise your business is going to sell, the entry of this transaction into your accounting system is:

Merchandise For Sale . (Inventory) account . $100

. Checking account . $100 That is, you debit the Merchandise For Sale (Inventory) account and credit the Checking account. In this case, you would write a check – in QuickBooks – to your vendor for $100 and show that it was being charged to your Inventory account. QuickBooks would make the debit and credit entries into the accounts for you.

Page 14: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Accounting Primer

8

In fact, there are very few kinds of transactions where you'll make the entries directly into the accounts. For almost all transactions, you fill in a form you're familiar with – a check or an invoice – and QuickBooks makes the debit and credit entries into the accounts for you. For those few transactions where you make the entries directly into the accounts – sales and deposit entries (see page 11) and payroll entries (see pages 24 and 25) – I show you which accounts to debit and credit. That's it. That's about as much accounting as you need to know. It may be more than you want to know. Your accounting system and the real world Each account in your accounting system corresponds to an account in the real world. The most obvious example is your checking account – your QuickBooks will have an account called something like "Checking Account." Your company has a checking account at a bank. The balance in your QuickBooks' "Checking Account" is only useful if it is the same as the balance in your checking account at the bank. Something similar is true for each account in your accounting system, though it's not always as obvious. You enter each of your business's transactions into QuickBooks so that the two –QuickBooks and the real world – match. If they don't match, QuickBooks can't give you the information that will help you run your business. Reconciling To help you match QuickBooks and the real world, at the end of each month you should match each transaction on your bank statement(s) and credit card statement(s) to the entries in QuickBooks. In accounting-speak, this is called reconciling. QuickBooks has a built-in process for reconciling your bank accounts – see its Help for directions on how to do this.

Page 15: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Accounting Primer

9

A little more accounting, but only if you're curious

Debits and Credits You don't really need to know more about debits and credits than that the debits go on the left and the credits go on the right. But if you're curious, debits and credits increase or decrease the balances in accounts as follows:

Asset accounts

A Debit increases the balance

A Credit decreases the balance

Liability accounts

A Debit decreases the balance

A Credit increases the balance

Equity accounts

A Debit decreases the balance

A Credit increases the balance

Income accounts

A Debit decreases the balance

A Credit increases the balance

Expense accounts

A Debit increases the balance

A Credit decreases the balance Going back to the purchase of inventory example on page 7, the debit to the inventory account, an asset account, increases its balance, and the credit to the checking account, another asset account, decreases its balance. That is, paying for inventory with a check increases your inventory and decreases the balance in your checking account.

Page 16: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Customers and Income I've separated Customers and Income into three sections:

Customers and Income 1 discusses businesses that receive payment at the time of sale.

This is typical for retail businesses.

Customers and Income 2 discusses businesses that invoice their customers.

Many service businesses and almost all business-to-business businesses do this.

Customers and Income 3 discusses businesses that use software that is not part of their accounting software to do their billing and keep track of their sales and accounts receivable.

Many professional services businesses (doctors, attorneys, accountants) do this.

10

Page 17: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

11

Customers and Income 1 This section discusses how to account for sales when your business receives payment when a sale is made. This is typical for retail businesses. Entering sales and deposits into QuickBooks If your business is paid when a sale is made, you should enter sales and deposits information for each day your business has sales. This doesn't mean that you need to make a deposit each day, only that you should prepare a separate deposit for each day. You can make the deposit when it's convenient for you. Preparing a deposit for each day's sales makes it easy to reconcile your bank statement at the end of the month. Use a Daily Sales and Deposits form to gather the information about each day's sales and deposits. Then enter the information from this form into QuickBooks as a general journal entry. In a general journal entry, you enter the debits and credits directly into the accounts in QuickBooks. QuickBooks' Help will tell you how to make a general journal entry. The sales and deposits general journal entry is: Line 1 – Credit the Taxable Sales account for the amount of sales subject to sales tax. Line 2 – Credit the Non-Taxable Sales account for the amount of sales not subject to sales tax. Line 3 – Credit the Sales Tax Liability account for the amount of sales tax. Line 4 – Debit the bank account that you make deposits to for the amount of sales that were paid for in cash or with a check. Line 5 – Debit the bank account that your credit and debit card sales are deposited to for the amount of MasterCard and Visa credit and debit card sales. Line 6 – Debit the bank account that your credit card sales are deposited to for the amount of other credit card – for example, American Express – sales.

Page 18: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Customers and Income 1

12

Line 7 – Debit or Credit the Cash Over and Short account for the difference between Total Sales and Total Deposits. You debit the Cash Over and Short account if the deposit is short and credit it if the deposit is over. File the completed Daily Sales and Deposits form in the Current Deposits file. Depositing sales receipts Prepare a deposit for each day that the business has sales. Make a copy of each check if there are checks in your deposit. If you make copies of more than one check on a page, have them all facing the same way so they're easy to read. Prepare a deposit slip listing the cash and checks you're going to deposit. Make a copy of the deposit slip. Staple the copy of the deposit slip to the Daily Sales and Deposits form and the copies of the checks and file them in the Current Deposits file. Make the deposit at your bank. After you've made the deposit, staple the deposit confirmation you receive from your bank to the copy of the deposit slip, the Daily Sales and Deposits form, and the copies of the checks, and file them back in the Current Deposits file. You'll use them when you reconcile your bank statement. Depositing amounts you receive that are not sales receipts If you receive money for anything other than sales – for example, a refund check from one of your vendors – prepare a separate deposit slip and deposit it separately at your bank. This makes it easy to reconcile your sales deposits. Prepare and file the deposit documents the same way you do for sales deposits.

Page 19: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Customers and Income 2 This section discusses businesses that invoice their customers. Invoicing customers If you invoice your customers for their purchases, you need an invoicing procedure. Your QuickBooks' Help will tell you how to create an invoice. It will not tell you how to gather the information you need to create an invoice, which is one of the things an invoicing procedure does. Your invoicing procedure will be specific to your company – which is why I can't tell you how to set one up – but I can tell you the two most important things about an invoicing procedure:

Information – It has to document all the information about your product or service that goes on your invoice

Timeliness – It should generate an invoice as soon as possible after your product is sent or your service is provided

How soon will depend on your business – many product businesses send an invoice within two days, many service businesses invoice weekly or monthly.

Talk to your accountant if you need help creating an invoicing procedure that works for your company. Invoicing and QuickBooks You can have QuickBooks print your invoices. However, you may prefer to use your own invoice rather than the one created by QuickBooks. If this is the case, you can still use QuickBooks to keep track of your accounts receivable – simply prepare an invoice in your QuickBooks but don't send it to your customer, send the invoice you create. This allows you to keep your existing invoicing procedure and form, and have QuickBooks keep track of what your customers owe you.

13

Page 20: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Customers and Income 2

14

Receiving payments from customers When you receive a payment for an invoice from a customer, follow the directions in QuickBooks' Help to enter the payment. Depositing customer invoice payment checks Make a copy of each of the checks you're going to deposit. Copy the entire check, including the check stub, if there is one. If there's anything attached to a check – a letter, note, agreement, etc. – make sure it gets dealt with appropriately. If you make copies of more than one check on a page, have them all facing the same way so they're easy to read. Prepare a deposit slip listing the checks you're going to deposit. Make a copy of the deposit slip and staple it to the front of the check copies. File these copies – the deposit slip and check copies – in the Current Deposits file. Make the deposit at your bank. After you've made the deposit, staple the deposit confirmation you receive from your bank to the front of the deposit slip and checks copies. File these documents back in the Current Deposits file. You'll use them when you reconcile your bank statement. If you receive payments electronically If you receive payments electronically, print the deposit confirmations you receive and file them in the in the Current Deposits file. You'll use them when you reconcile your bank statement.

Page 21: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Customers and Income 3 This section discusses businesses that use software other than their accounting software to do their invoicing. Invoicing customers using software other than accounting software Many businesses use software that is not part of QuickBooks to do their invoicing and keep track of what their customers owe them. The most common reason is that they use other software that includes invoicing – for example, many legal and accounting firms use their professional practice software to do their invoicing. Talk to your accountant if you use, or plan to use, software other than QuickBooks to do your invoicing. Depositing sales receipts When you prepare a deposit, put the deposit information together in a way that helps the person who keeps track of your outstanding invoices (even if you are that person) do their job: Make a copy of each of the checks you're going to deposit. If you make copies of more than one check on a page, have them all facing the same way so they're easy to read. Prepare a deposit slip listing the checks you're going to deposit. Make a copy of the deposit slip. Staple the copy of the deposit slip to the copies of the checks and file them in the Current Deposits file. Make the deposit at your bank. After you've made the deposit, staple the deposit confirmation you receive from your bank to the front of the copy of the deposit slip and the check copies and file them back in the Current Deposits file. You'll use them when you reconcile your bank statement.

15

Page 22: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Customers and Income 3

16

If you receive payments electronically If you receive payments electronically, print the deposit confirmations you receive and file them in the Current Deposits file. You'll use them when you reconcile your bank statement.

Page 23: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Inventory If your business sells merchandise, you may have to deal with inventory. This is because the cost of merchandise that is sold by the business (in accounting-speak, Cost of Goods Sold) is an expense that's reflected on your Income Statement and is deducted as an expense on your tax returns, while merchandise that is not sold is inventory, an asset, that's reflected on the Balance Sheet and is not deducted as an expense on your tax returns. How do you determine the Cost of Goods Sold? Let me give you an example. At the end of 2008, Addison Widgets had $15,000 worth of widgets in inventory. During 2009 they purchased $125,000 of widgets, and at the end of 2009 they had $25,000 worth of widgets in inventory. What was Addison's 2009 Cost of Goods Sold? It was $115,000, calculated as follows:

2008 ending inventory $15,000

2009 purchases (plus) $125,000

2009 ending inventory (minus) $25,000

2009 Cost of Goods (widgets) Sold (equals) $115,000 Determining the value of ("taking") inventory If you have inventory, you need to determine its value. In accounting-speak, determining the value of inventory is called "taking inventory." Always take inventory at the end of the year because its value is used to determine your business's Cost of Goods Sold, which can have a major impact on your business's income. Use the Inventory Tally Sheet, which you'll find in the Forms chapter starting on page 50, to take inventory.

17

Page 24: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

18

Vendors and Expenses Paying vendors' bills Your QuickBooks' Help will tell you how to enter vendors' bills. It will not help you with your procedures for handling the bills from the time you get them until they're paid and filed. You need a procedure, even if it's just to stack the bills up until you pay them. A date stamp makes it easy to handle vendors' bills. I suggest that you use one to record three different events on each bill:

When the bill is received

When the bill is entered into QuickBooks

When the bill is paid You can buy a date-stamp at an office supply store. When the bill is received, date-stamp the bill and write, under the date-stamp, the name of the person who received the bill and the account(s) the bill will be charged to. If the bill needs to be approved before it can be paid, have the person who can approve it sign and date the bill showing that they approve it for payment. When the bill is entered into QuickBooks, date-stamp the bill and write, under the date-stamp, the name of the person who entered it. When the bill is paid, date-stamp the bill and write, under the date-stamp, the check number and the name of the person who wrote the check. If a bill is too small to have room for all this information, make a copy of the bill, staple or tape the bill to the front of the copy and date-stamp the copy.

Page 25: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Vendors and Expenses

19

How do you pay bills? There are many ways to pay vendors' bills. You can pay them:

With cash

With a debit card

With a credit card

Online

By writing a check You probably pay bills more than one way. For example, you may write checks for most bills, but use a debit card when you pick up stuff from some vendors and a credit card when you travel or entertain customers. You will have a slightly different procedure for each. The first way to pay a bill – with cash You pick up something from a vendor and pay cash for it. Reimburse yourself from petty cash – please see the Petty Cash chapter starting on page 45. The second way to pay a bill – with a debit card You pick up something from a vendor and pay with the company's debit card. Take the receipt back to your office, highlight the vendor's name, the items purchased, the date and the amount and file the receipt in the Debit Card Receipts file. Each month, before you reconcile the bank account that debit card payments are made from, prepare a Debit Card Disbursements form from the receipts in the Debit Card Receipts file, put all the receipts into an envelope and staple the envelope to the form. Then enter each debit on the form into QuickBooks as a check – use "Debit" for the check number. This lets you reconcile the debit card purchases when you reconcile your bank statement.

Page 26: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Vendors and Expenses

20

The third way to pay a bill – with a credit card You travel to another city on business and pay with the company's credit card. Take the receipt back to your office, highlight the vendor's name, what the expense was for, the date and the amount and file the receipt in the Credit Card Receipts file. Each month, before you reconcile the credit card statement to the credit card account, prepare a Credit Card Disbursements form from the receipts in the file, put all the receipts into an envelope and staple the envelope to the form. Then make a general journal entry into QuickBooks for each credit card charge on the form. In a general journal entry, you enter the debits and credits directly into the accounts in QuickBooks – please see QuickBooks' Help for directions on how to make a general journal entry. The general journal entry for a payment to a vendor is:

Debit the expense account for the kind of expense

For example, if the expense was for supplies, debit the Supplies account.

Include the name of the vendor, what was purchased and the name of the person who made the purchase in the "Description" field.

Credit the account of the credit card that was used

You need to have an account for each of your company's credit cards. You enter a credit card purchase this way because the money does not come out of your checking account when you make the purchase, as it does when you pay with a debit card, but is charged to the credit card, so you need a place to show the amounts that have been charged on the credit card. You'll pay the credit card bill later. The fourth way to pay a bill – online You buy something online and pay for it with a debit to your company's checking account. This is the same as paying with a debit card and is handled the same way. You buy something online and pay for it with a credit card. This is the same as paying with a credit card and is handled the same way.

Page 27: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Vendors and Expenses

21

In either case, be sure to print a receipt and file it in the Debit Card Receipts or Credit Card Receipts file. The fifth way to pay a bill – with a check There are three different ways to pay vendors' bills by check:

You can hand-write a check to a vendor then enter the check into QuickBooks

You can use QuickBooks to write a check to a vendor

You can enter several of your vendors' bills into QuickBooks, then have QuickBooks write checks for several of the bills that have been entered

The first two are simple. If you have any questions you can find the answers in QuickBooks' Help. The third way is slightly more involved. When you get a bill from a vendor, date-stamp it as received and put it in the Vendor Bills Waiting To Be Entered (into QuickBooks) file. This file holds, as its name suggests, bills that are waiting to be entered into QuickBooks. When you're ready to enter the bills into QuickBooks, take them out of the Vendor Bills Waiting To Be Entered file and enter them. After the bills have been entered, date-stamp each bill as entered and file them in the Vendor Bills Waiting To Be Paid file. If you have a lot of bills you should get an A-to-Z expanding file and file them by the vendor's name. When you're ready to pay bills, print the Accounts Payable Aging report (see QuickBooks' Help for directions). This will give you a list of vendor bills that are waiting to be paid. Decide which bills you're going to pay and pull these bills out of the Vendor Bills Waiting To Be Paid file. Print checks to pay these bills (see QuickBooks' Help for directions). Sign the checks.

Page 28: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Vendors and Expenses

22

Date-stamp each bill as paid. Mail the checks and file the paid bills in the vendors' files.

Page 29: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

23

Payroll If you have employees, have a payroll service prepare your payroll and deposit your payroll taxes. QuickBooks provides the capability to prepare payroll – don't use it. (However, Intuit, the company that created QuickBooks, also provides a payroll service and I suggest that you consider them when you look for a payroll service.) Payroll is the most complex part of accounting at almost all small companies.

Every time you write a payroll check you have to keep track of six federal payroll taxes, plus any state payroll taxes, and this does not include any employee deductions for health insurance, savings plans, retirement plans, etc.

You'll make a dozen or more federal payroll tax deposits each year, plus any state payroll tax deposits you're required to make

You'll also file five federal payroll tax returns each year, plus any state payroll tax returns you're required to file

In all this, it's very easy to make mistakes – and payroll tax mistakes can be difficult and expensive to straighten out. Payroll services know how to do payroll, and they do it cheaper than you can. A payroll service can also provide you with the forms you need, including timesheets, and help you meet the many legal requirements your company becomes subject to when you hire employees, from reporting a new hire to your state's employment tax authority to personnel policies. Before you begin Payroll is complex and you may find these instructions difficult to follow. Ask your accountant if you need help. Entering payroll into QuickBooks The good news about entering payroll into QuickBooks is that you don't have to duplicate the payroll reports you receive from your payroll service – you make a

Page 30: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Payroll

24

simple general journal entry that summarizes the information on these reports. All the detail about the payroll is on the payroll reports, so that if there's ever a question about payroll you can answer it from these reports. In a general journal entry, you enter the debits and credits directly into the accounts in QuickBooks. QuickBooks' Help will tell you how to make a general journal entry. You need to set up the following accounts in QuickBooks to make the payroll general journal entry:

Payroll Clearing (set up as a Checking account)

Payroll Expense (set up as an Expense account)

Payroll Tax Expense (set up as an Expense account) You will also need to set up a vendor – not an employee – named zz-Employee – I'll explain how you use this after I show you the payroll general journal entry. Each of the amounts that will be included in the payroll general journal entry is on the reports you get from your payroll service. If you aren't sure where to find them, ask your payroll service's customer service for help. If you can't get the information you need from them, ask your accountant for help. The simple payroll general journal entry (Use the General Journal Entry form, which you'll find in the Forms chapter starting on page 50, to gather the information for this general journal entry.) The simple payroll general journal entry is: Line 1 – Debit the Payroll Expense account for the gross payroll.

Gross payroll is the total amount of payroll before any deductions are taken out.

Line 2 – Debit the Payroll Taxes account for the amount of payroll taxes paid by your company.

This is only the payroll taxes paid by your company – it does not include any of the taxes deducted from your employees' payroll checks.

Page 31: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Payroll

25

Line 3 – Credit the Payroll Clearing account for the net amount paid to your employees.

This is the total of your employees' net payroll checks, their paychecks after all deductions.

Line 4 – Credit the checking account that payroll is paid from for the amount paid to tax authorities.

This is the total of the payroll taxes paid by your company (Line 2) plus the total of the payroll taxes deducted from your employees' payroll checks.

If some of your employees have direct deposit – that is, their payroll is deposited directly into their bank accounts – modify this entry as follows: Line 3 – Credit the Payroll Clearing account for the net amount paid to employees whose checks are not deposited directly into their bank accounts. Then add another line, Line 3a. Line 3a – Credit the checking account that payroll is paid from – not the Payroll Clearing account – for the total amount paid to employees whose payroll is deposited directly into their bank accounts. When you've finished preparing the general journal entry, make sure that the total amount of the debits equals the total amount of the credits. If they don't, check the numbers on the payroll reports against the numbers on your general journal entry. If the numbers seem to be OK, ask your accountant for help. Staple the completed General Journal Entry form to copies of the reports you used to prepare the payroll general journal entry – not all of the reports you received from the payroll service – and file it with your payroll reports. Entering payroll checks into QuickBooks After you've made the payroll general journal entry, enter the net amount of each employee's payroll check into QuickBooks. You enter these checks the same way you enter any other checks. Write each check to zz-Employee (remember, the employee's name is on the reports from your payroll service so you don't need to enter it here) and charge it to the Payroll Clearing account.

Page 32: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Payroll

26

When you've entered all the payroll checks, the balance in the Payroll Clearing account will be zero. Check this. If the balance in the Payroll Clearing account isn't zero and you can't figure out why, ask your accountant for help. You enter the payroll checks this way so that you can include them in the checking account reconciliation at the end of the month. You enter the direct deposit amount as a lump sum because this amount will appear on your checking account statement and you will be able to reconcile it. Beyond the simple payroll general journal entry

if your payroll includes other deductions If your payroll includes other deductions from your employees' payroll checks – for example, for health insurance, savings plans, retirement plans, etc. – work with your accountant to include these in your payroll general journal entry. A suggestion I suggest that you not include anything but payroll to employees in payroll. Do not include, for example, expense reimbursements or payments to contractors.

Page 33: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Internal Controls What are internal controls? Internal controls are procedures designed to protect your business's assets – to keep people from:

Stealing money or inventory

Taking actions that could be detrimental to your business The kinds and extent of internal controls depends on your business. Work with your accountant to develop internal control procedures that work for your company. I have two suggestions:

Separate the responsibility for physical control of an asset (for example, cash and inventory) from the responsibility for record-keeping for the asset, and assign these responsibilities to different people

The only people who should have authority to sign checks, make agreements or sign contracts for your company are people you trust to use it with care and only for the company's benefit

Include a list of authorities in your business information (please see the Business Information chapter starting on page 32):

Who has the authority to sign checks and any limits on this authority

Who has the authority to make or approve purchases and any limits on this authority

Who has the authority to make agreements and sign contracts and any limits on this authority

Any other authority to act for your company and any limits on the authority

I strongly recommend that you have a very low tolerance for dishonesty – far too many business owners have paid dearly to learn that "People who lie, lie," and "People who steal, steal."

27

Page 34: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

28

Financial Statements The basic financial statements are the Income Statement (also known as the Profit and Loss Statement or P&L) and the Balance Sheet. Income Statement The Income Statement gives you information about your sales, expenses and income. The information on the Income Statement is only for the period of the statement:

A monthly statement shows your sales, expenses and income for a single month

A quarterly (see Quarters, below) statement shows your sales, expenses and income for a quarter

An annual statement shows you sales, expenses and income for an entire year

Balance Sheet The Balance Sheet shows you what the business owns (assets), what the business owes (liabilities), and the difference (equity), which is what the owners of the business own. The information on the Balance Sheet is as of a specific date, in contrast to the information on the Income Statement, which is for a period of time. Quarters Accounting divides the year into four quarters:

The first quarter is January through March

The second quarter is April through June

The third quarter is July through September

The fourth quarter is October through December

Page 35: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

29

Cash Flow Projection The first rule of business is "Never run out of cash." If you run out of cash, you're out of business! A cash flow projection is a financial management tool that will help you ensure that your company doesn't run out of cash. It will help you look into the near future – the next couple of weeks or months – and predict how much cash the company will have. It's easy to prepare a cash flow projection. Preparing a cash flow projection Decide how far into the future you want to look, then: One – Write down the balances in each of your company's cash accounts – the checking accounts, the savings accounts and any other accounts that hold the company's cash – and total them. Two – Make a list of all the money you expect the company to receive over the period you're looking at and total it. Include, in addition to payments you expect to receive from customers, any money from any other source – for example, loans. Three – Make a list of all the money you expect the company to pay out over the same period and total it. When you've done this, add One and Two and subtract Three. This tells you how much cash will be available to the company at the end of the period you're looking at, and gives you information you can use to make sure your company doesn't run out of cash. Update this as often as you think necessary. I recommend that you prepare a cash flow projection at the beginning of each month.

Page 36: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Financial Reporting, Financial Review

and Tax Planning Financial Reporting As soon as you can after the end of each month – when you receive the statements – reconcile the bank and credit card accounts. Then print the previous month's Income Statement, Balance Sheet, Accounts Receivable Aging report (if you enter invoices to your customers into your accounting software) and Accounts Payable Aging report (if you enter invoices from your vendors into your accounting software). A word about reconciliations Reconciliations help ensure that your financial statements are correct, and that your accounting system can provide you with information you can use to run your business. Financial Review Review the Income Statement to see how your business is doing. Review the Accounts Receivable Aging report to see if there are any customers you should contact about their outstanding invoices. Review the Accounts Payable Aging report to see if there are any bills you should pay. Review the Balance Sheet to, first, make sure the accounts receivable and accounts payable totals match the totals on the aging reports, and, second, to make sure there are no unexpected changes in any of the accounts. If there's anything on any of these reports that you think is wrong or don't understand, ask your accountant for help. Review the prior month's cash flow projection, then prepare one for the coming month.

30

Page 37: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Financial Reporting, Financial Review and Tax Planning

31

It's a good idea to review your Income Statement and Balance Sheet with your accountant at the end of each quarter. Tax Planning You should discuss tax planning with your accountant at the meeting where you review your third quarter financial statements. Ask him if there are any tax planning issues you need to be aware of, and what your options are with each issue.

Page 38: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

32

Business Information Have a place where people at your company can find information they may have a reason to access. I separate this information into three categories:

General information

Information that many people at your company may have a reason to access.

Other information

Information that only specific people or functions at your company may have a reason to access.

Confidential information

Information that very few people at your company may have a reason to access.

Your company may classify the information differently, and may include more or less information than I suggest below. In addition to this information, you may want to put together a couple of procedures manuals. Procedures are the accumulated wisdom of your company, and procedures manuals document this wisdom and make it easier to:

Get several – or many – people to agree on how to do something

Change a procedure

Train people

General information

The name, address, phone number, fax number, email address and

website of the company or each company location

Page 39: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Business Information

33

General information (continued)

Names and phone numbers, fax numbers, email addresses and

websites of people and organizations that people at your company may have a reason to contact

Owners and managers of the company

Employees

Alarm company

Workers' compensation carrier

Hospital

Police

Company authority information

Who has the authority to sign checks and any limits on this authority

Who has the authority to make or approve purchases and any limits on this authority

Who has the authority to make agreements and sign contracts and any limits on this authority

Any other authority to act for your company and any limits on the authority

Other information

Company information

State resale license number

Federal Employer Identification Number

State employer tax ID

State corporate ID

Business licenses and permits information

Page 40: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Business Information

34

Other information (continued)

Names and phone numbers, fax numbers, email addresses and

websites of people and organizations that people at your company may have a reason to contact

Customers

Vendors

Bank

Payroll service

Accountant

Attorney

Tax authorities

Computer and software license information

License ID

Registration number

Maintenance agreements and support information

Schedule information

Tax return filing dates

Business licenses and permits renewal dates

Records retention schedule

Board of Directors meeting dates

Shareholders' meeting dates

Partners' meeting dates

Website address renewal dates

Patent and trademark renewal dates

Lists

Projects list

Fixed assets list

Real property list

Page 41: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Business Information

35

Confidential Information

Financial information

The most recent month's and year-to-date Income Statement and Balance Sheet

The most recent Accounts Receivable Aging report

The most recent Accounts Payable Aging report

All other financial statements and financial analysis documents prepared for the company, including but not limited to: cash flow projections, budgets, budget-to-actual comparison

Other confidential information

Computer system sign-on IDs and passwords

Alarm service information, including account numbers and alarm codes

Bank information, including account numbers

Tax returns

Copies of the last three years' federal and state income tax returns

Copies of the last four quarters' payroll tax returns

Copies of the last three years of all other tax returns filed by your company

Important company documents

If your company is a corporation, a copy of the Articles of Incorporation, Corporate By-Laws, and the minutes of the Board of Directors and Shareholders' meetings

If your company is a partnership, a copy of the Partnership Agreements

Page 42: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Business Information

36

Manuals

Employee Handbook

Operating Procedures Manual

Finance and Accounting Procedures Manual

Personnel Procedures and Job Descriptions

Page 43: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

37

Files Paper is one of the biggest headaches in business. You're not alone if you occasionally – or even more than occasionally – feel like it gets in the way of doing business. The way to deal with paper is to organize it – put it into files. But files are hardly less of a headache. Isn't there a way we can get rid of all the paper? The short answer is – No. A word about paperless Paperless is a grand idea. But even if you convert all your paper documents into electronic documents, you still have to organize them so that you can find a document when you need it. Documents and accounting Every entry into QuickBooks comes from information on one or more documents. When there's a question about an entry in QuickBooks – and these questions come up all the time – the answer will be found on documents in your files. Therefore, managing paper is important. If you're not comfortable doing it – and few of us are – try to get someone who is comfortable managing paper to help you. If the paperwork is not handled well – if, for example, you lose documents: invoices, checks, shipping documents, production documents, contracts – your business could suffer. Why keep all the paper? You keep paper because it has information you need. You organize the paper because you don't have information if you can't find it.

Page 44: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Files

38

What files does your company need?

Have files for all of the following that apply to your company. The numbers in parentheses refers to the page in this chapter where you can find information about these files.

Current Deposits file (page 41)

Debit Card Receipts file (41)

Credit Card Receipts file (41)

Vendor Bills Waiting To Be Entered (into QuickBooks) file (41)

Vendor Bills Waiting To Be Paid file (42)

Customer files (42)

Customer Information files (42)

Vendor files (42 and 43)

Vendor Information files (43)

Employee files, for both current (43) and former employees (44)

Payroll files (44)

Job / Project files, for both active and inactive jobs / projects (44)

Inventory files (45)

Fixed Asset files (45)

Business Licenses and Permits files (45)

Financial Statements files (45)

Tax files (45)

Insurance files (46)

Retirement Plan files (46)

Corporation file, if your company is a corporation (46)

Partnership file, if your company is a partnership (46)

Page 45: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Files

39

How should these files be set up and what should be in them? Current Deposits file

Label: "Current Deposits"

Contents: Deposit documents. Please see "Depositing sales receipts" on pages 1 and 12, and "Depositing customer invoice payment checks" on page 14.

Once the bank statement has been reconciled, the deposit documents go into the Financial Statements files.

Debit Card Receipts file

Label: "Debit Card Receipts"

Contents: Debit card receipts. Please see "The second way to pay a bill – with a debit card" on page 19.

Once the bank statement has been reconciled, the Debit Card Disbursements form with the envelope with the receipts go into the Financial Statements files.

Credit Card Receipts file

Label: "Credit Card Receipts"

Contents: Credit card receipts. Please see "The third way to pay a bill – with a credit card" on page 20.

Once the credit card statement has been reconciled, the Credit Card Disbursements form with the envelope with the receipts go into the Credit Card vendor file.

Vendor Bills Waiting To Be Entered (into QuickBooks) file

Label: "Vendor Bills Waiting To Be Entered"

Contents: Original vendor invoices that have not been entered into QuickBooks. Please see The third way is slightly more involved on page 21.

Page 46: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Files

40

Vendor Bills Waiting To Be Paid file

Label: "Vendor Bills Waiting To Be Paid"

Contents: Original vendor invoices that have not been paid. Please see The third way is slightly more involved on page 21.

Customer files

Put these files in alphabetical order by the customer's name.

Label: "Customer / [ customer's name ]"

The first file is Customers / Various for customers that have fewer than three invoices.

Contents: Copy of each customer invoice with supporting documents attached.

Create a new set of customer files at the beginning of each year, and put the prior year's files into storage when they are no longer needed, usually after about three months.

Customer Information files

For customers that have a Customer Information file, the file goes directly behind the customer's Customer file.

Label: "CI / [ customer's name ]"

Contents: Customer documents you will keep beyond the end of the current year – for example, customer contracts.

Vendor files

Put these files in alphabetical order by the vendor's name.

Label: "Vendor / [ vendor's name ]"

The first file is Vendor / Petty Cash for the petty cash receipts. Please see Petty Cash starting on page 45. The second file is Vendors / Various for vendors that have fewer than three invoices.

Page 47: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Files

41

Vendor files (continued)

Contents:

The original of each paid vendor invoice and supporting documents.

W-9 (IRS – "Request for Taxpayer Identification Number and Certification")

Ask your accountant for information about when you are required to get this form from a vendor.

Create a new set of vendor files at the beginning of each year, and put the prior year's files into storage when they are no longer needed, usually after about three months.

Vendor Information files

For vendors that have a Vendor Information file, the file goes directly behind their Vendor file.

Label: "VI / [ vendor's name ]"

Contents: Vendor documents you will keep beyond the end of the current year – for example, vendor contracts.

Current employee files

Put these files in alphabetical order by the employee's last name.

Label: "Employee / [ employee's name ]"

Contents: All employment-related documents, including but not limited to:

Employment application

Resume

W-4 (IRS – "Employee's Withholding Allowance Certificate")

Payroll direct deposit forms

Wage garnishment orders

One document that does not go into each employee's file is form I-9 (US Citizenship and Immigration Services – "Employment Eligibility Verification").

Page 48: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Files

42

Form I-9 (US Citizenship and Immigration Services – "Employment Eligibility Verification") file

Have a separate file for I-9 forms and other employment eligibility documents for current and former employees.

You do this to ensure that the US Citizenship and Immigration Services, which can inspect these forms, does not have access to other documents in an employee's file because that would compromise your employees' privacy.

Former employee files

When an employee no longer works for your company, put their file in storage. Put these files in order by the employee's last name.

Label: "Employee / [ employee's name ] INACTIVE"

Contents: The same as the current employee files. Payroll files

Put these files in order by quarter and year.

Label: "Payroll / [ quarter and year ]"

Contents: All payroll reports. Active Job / Project files

Put these files in order by the job / project's name or identifier.

Label: "Job (or "Project) / [ job / project's name or identifier ]"

Contents: Job / project-related documents, including permits, if required for the job / project.

Inactive Job / Project files

When a job / project has been completed or is no longer active, put its file in storage. Put these files in order by the job / project's name or identifier.

Label: "Job (or "Project) / [ job / project's name or identifier ] INACTIVE"

Contents: The same as the active job / project file.

Page 49: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Files

43

Inventory files

Put these files in order by the date inventory was taken.

Label: "Inventory / [ the date the inventory was taken ]"

Contents: Inventory tally sheets. Fixed Asset files

Keep a record of each fixed asset from the date you buy it until it is sold or otherwise disposed of.

Label: "Fixed Asset / [ the name or identifier of the asset ]"

Contents: All documents associated with the asset from the time it's purchased until it is sold or otherwise disposed of.

Put the files of assets that have been disposed of in storage. Business Licenses and Permits file

Keep all business licenses and permits – but not the job / project permits, which go into the Job / Project files – and all related documents in this file.

Financial Statements files

Put these files in order by month.

Label: "Financial Statements / [ month and year ]"

Contents: All financial statements and supporting documents, including bank statement and reconciliations, and deposit documents.

Tax files

Have a separate file for each tax return your company files.

Label: "Tax Return / [ the name or number and period of the return ]"

Contents: The tax return and supporting documents.

Page 50: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Files

44

Insurance files

Have a separate file for each insurance policy your company carries.

Label: "Insurance / [ the kind of insurance ]"

Contents: All documents associated with the policy. Retirement plan files

Have files for all documents associated with each of your company's retirement plans.

Label: "Retirement Plan / [ the name of the retirement plan ]"

Contents: All documents associated with the retirement plan. Corporation file (if your company is a corporation)

Label: "Corporation File / [ the name of the corporation ]"

Contents: All corporation-related documents, including but not limited to:

Articles of incorporation

Corporate By-Laws

Capital Stock book

Board of Directors meeting minutes

Shareholders' meeting minutes Partnership file (if your company is a partnership)

Label: "Partnership File / [ the name of the partnership ]"

Contents: The Partnership Agreements and all partnership-related documents.

Page 51: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

45

Petty Cash Petty cash is used to pay cash for small expenses of the business – for example, shop and office supplies and COD deliveries, among other things. Setting up a petty cash fund To set up a petty cash fund, create an account called Petty Cash as a checking account in QuickBooks. Write a check to "Cash" for however much you think you need to keep handy to pay for small expenses – most businesses keep $100 to $200 in petty cash – and charge it to the Petty Cash account. Cash the check, put the cash and several Petty Cash Expense forms into a petty cash box. You can buy a petty cash box at an office supply store. When you pay cash for something When you pay cash for something for the business, fill out a Petty Cash Expense form, staple the receipt to the form, reimburse yourself from the cash in the petty cash box, and put Petty Cash Expense form with the receipt in the petty cash box. Replenishing petty cash When the business needs more cash in petty cash:

Take the Petty Cash Expense forms out of the petty cash box and fill out the Petty Cash Disbursements form from information on the Petty Cash Expense forms.

Write a check to "Cash" for the total amount of the disbursements.

Cash the check and put the cash in the petty cash box. Then fill out the Petty Cash Disbursements Summary form from information on the Petty Cash Disbursements form and make a general journal entry into QuickBooks from information on the Petty Cash Disbursements Summary form. Put the receipts, Petty Cash Expense forms and Petty Cash Disbursements form(s) into an envelope, staple the Petty Cash Disbursements Summary to the envelope and file the envelope and form in the Petty Cash vendor file.

Page 52: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

46

Fixed Assets What are fixed assets? Fixed assets are the equipment, cars, furniture, fixtures, office equipment, computers and software that are used by the business to do business. They are not for sale by the business (thought they are sometimes sold) – items that are for sale by the business are inventory. Depreciation Fixed assets are different than other things your business buys because you cannot deduct their cost as an expense when you buy it, but a part of the cost is deducted (the accounting-speak term is depreciated) each year until the entire cost is deducted. (Under some circumstances, section 179 if the Internal Revenue Code allows you to deduct the entire cost of a fixed asset when you buy it.) Because fixed assets are depreciated, the accounting for them is different than the accounting for other things your company buys – work with your accountant to ensure that they are accounted for correctly. Information about fixed assets You need to gather specific information about each fixed asset when you:

Buy it

Make capital improvements to it

Sell or dispose of it The fixed asset forms in the Forms chapter starting on page 50 give you a place to gather this information.

Page 53: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

47

Other Stuff Mail and email You cannot afford to overlook important documents and information that come to your company through the mail and email. Therefore, the person who opens the mail and email must understand what's important and what to do with important stuff. In many cases, you are that person. Be very cautious about delegating responsibility for opening the mail and email. Chart of accounts The chart of accounts is a list, in QuickBooks, of your company's accounts. There are only three reasons to include an account in your chart of accounts:

The account is on the tax return your company files with the IRS or your state

You can use the account to help you manage some aspect of your business

It gives you specific information that you want Work with your accountant to make sure your chart of accounts meets your company's needs. I have three pieces of advice about the chart of accounts:

Make a list of your accounts and review it with your accountant before you set up your company in QuickBooks

Use account numbers

They make it easier to group accounts on your financial statements in ways that are meaningful to you.

Do not use sub-accounts

I have found only one case where sub-accounts were helpful, and that is for the checking accounts of some non-profit organizations.

Page 54: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Other Stuff

48

When you set up your chart of accounts, start with the accounts on the tax return your company files with the IRS. Only include the accounts your company actually uses. You don't need to set up all the accounts you company will use when you set up your accounting system – QuickBooks allows you to add new accounts as you need them. Records retention Keep the following records permanently:

Federal and state income tax returns

Articles of incorporation

Corporate By-Laws

Board of Directors' meeting minutes

Stockholders' meeting minutes

Capital Stock book

Partnership Agreements

Financial statements

Your accounting software with all entries

Retirement and pension plan records Dispose of the following records five years after the tax year reported:

Federal and state payroll tax returns

Sales records, sales invoices and shipping documents

Accounts receivable records

Cash receipts records

Purchasing records and accounts payable invoices

Cash disbursements records

Bank statements and cancelled checks

Page 55: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Other Stuff

49

Dispose of the following records five years after the tax year reported (continued):

Deposit documents

Bank reconciliations

Employee time cards and time sheets

Payroll reports

General journal entries and supporting documents

Inventory records Keep the following records for the specified number of years:

Employee files – for 4 years after termination of the employee

Fixed asset records, including the original invoices – for 5 years after disposal of the asset

Page 56: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science

Forms I've included forms you may find useful at your company on the pages that follow. You can use these forms as templates to create your own forms. The easiest way to do this is to white out "Company Name" on the form and put in your company's name. The page numbers in parentheses refer to the page in the text where I've discussed the form. Sales and Deposits (page 11)

Daily Sales and Deposits Inventory (17)

Inventory Tally Sheet Debit Card Disbursements (19)

Debit Card Disbursements Credit Card Disbursements (20)

Credit Card Disbursements Payroll (24)

General Journal Entry Petty Cash (45 and 46)

Petty Cash Expense

Petty Cash Disbursements

Petty Cash Disbursements Summary Fixed Assets (46)

Purchase of an Asset

Conversion of an Asset

Capital Improvement to an Asset

50

Page 57: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Accounting Isn't Rocket Science Forms

51

Fixed Assets (continued)

Sale of an Asset

Disposal of an Asset Other Forms You may also find the following forms, which I did not discuss in the text, useful:

Guest Meal / Entertainment Expenses

Expense Report

Expense Report Summary

Business Mileage Log

Independent Contractor Invoice Guest Meal / Entertainment Expenses form

This form includes all the information the IRS requires you to provide to deduct these costs as business expenses. Expense Report forms

These forms give your employees a way to keep track of expenses they incur for your business, and to submit them for reimbursement. Business Mileage Log forms

These forms provide a way for your employees to keep track of their business mileage. Your accountant can tell you when employees are required to keep track of their mileage. Independent Contractor Invoice

This form provides you with an invoice to document a payment to an independent contractor who doesn't give you an invoice.

Page 58: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Daily Sales and Deposits

Sales

Taxable Sales $

Non-Taxable Sales $

Sales Tax Liability $

Total Sales $

Deposits

Cash $

Debit $

MasterCard / Visa $

American Express $

Total Deposits $

Difference $Cash Over / <Short>

Day and Date

Prepared byand Date

Company Name - Daily Sales and Deposits

Page 59: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

General Journal Entry

Description, Source documents and Date Acct No Debit Credit

Total

Prepared by and Date Entered by and Date

Company Name – General Journal Entry

Page 60: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Inventory Tally Sheet Location

Page of

Unit Item Units cost Extension

Total – this page

Prepared by and Date Reviewed by and Date

Company Name – Inventory Tally Sheet

Page 61: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page

Debit Card Disbursements Paid to – For Date Purchased by $ Account

Total – this page

Prepared by and Date

Company Name – Debit Card Disbursements

Page 62: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page

Credit Card Disbursements Paid to – For Date Purchased by $ Account

Total – this page

Prepared by and Date

Company Name – Credit Card Disbursements

Page 63: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Petty Cash Expense (Please attach the receipt to this form.)

Date $ Paid to For

Account No. Prepared by and Date

Company Name

Petty Cash Expense (Please attach the receipt to this form.)

Date $ Paid to For

Account No. Prepared by and Date

Page 64: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page 1

Petty Cash Disbursements

Date Paid to – For $ Account

Total – this page Total – all pages Prepared by and Date

Company Name – Petty Cash Disbursements

Page 65: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page

Petty Cash Disbursements

Date Paid to – For $ Account

Total – this page

Prepared by and Date

Company Name – Petty Cash Disbursements

Page 66: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Petty Cash

Disbursements Summary

Account $

Total Prepared by and Date

Company Name – Petty Cash Disbursements Summary

Page 67: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Purchase of an Asset

Purchase price $ Other costs Total $ Purchase Placed in date service date

Instructions – Attach copies of all relevant documents to this form, including invoice(s) for the purchase of the asset and invoices and timesheets for costs associated with the purchase and installation of the asset.

Notes

Asset description Prepared by and Date

Company Name – Purchase of an Asset

Page 68: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Conversion of an Asset

Converted from Business to Personal Use or Personal to Business Use

Conversion Fair market value date on conversion date $

Notes

Asset description Prepared by and Date

Company Name – Conversion of an Asset

Page 69: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Capital Improvement of an Asset Costs $

Total Cost $ Improvement date

Instructions – Attach copies of all relevant documents to this form, including invoice(s) for the improvement of the asset and invoices and timesheets for costs associated with the improvement of the asset.

Description of improvement

Asset description

Prepared by and Date

Company Name – Capital Improvement of an Asset

Page 70: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Sale of an Asset

Sale Sale date price $

Instructions – Attach a copy of the invoice for the sale of the asset.

Notes

Asset description Prepared by and Date

Company Name – Sale of an Asset

Page 71: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Disposal of an Asset

Disposal costs $ Total cost of disposal $ Book value $ Gain or <loss> $

Disposal date

Instructions – Attach copies of all relevant documents to this form, including all

invoices associated with the disposal of the asset.

Notes Asset description Prepared by and Date

Company Name – Disposal of an Asset

Page 72: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Guest Meal / Entertainment Expenses (Please attach receipts to this form)

Paid to $ Date

Additional information required by the IRS Please indicate whether Guest Meal or Entertainment Place Time

Business purpose

Business Name Firm Title relationship

Prepared by and Date Entered by and Date

Company Name – Meal / Entertainment Expenses

Page 73: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page 1

Expense Report

Date Paid to – For $

Total – this page Total – all pages Incurred by and Period

Company Name – Expense Report

Page 74: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page

Expense Report

Date Paid to – For $

Total – this page

Incurred by and Period

Company Name – Expense Report

Page 75: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Expense Report

Summary

Account $

Total Incurred by and Period

Company Name – Expense Report Summary

Page 76: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page 1

Business Mileage Log

Begin – End Day and Date To Miles

Total – this page Total – all pages Car Employee Month and Year

Company Name – Business Mileage Log

Page 77: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name Page

Business Mileage Log

Begin – End Day and Date To Miles

Total – this page

Employee Month and Year

Company Name – Business Mileage Log

Page 78: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit

Company Name

Independent Contractor

I n v o i c e

From Date

Invoice Total $

Rate (per hour) $ Total hours worked

Time worked Hours Date Service Provided Start Stop Worked

Page 79: Accounting Isn't Rocket Science - piazzarosso.com Isn't... · Accounting Isn't Rocket Science Forms page 50 Daily Sales and Deposits General Journal Entry Inventory Tally Sheet Debit