The Dashboard Digest

Am I supposed to charge sales tax?

So you own a business and you’re wondering if you are supposed to charge sales tax for what you sell or for a service that you provide.  You may be thinking, “I have a service based business and my neighbor doesn’t charge sales taxes, so I don’t have to.”  If that is what you are thinking, you may be very wrong.  For example, if your business is to repair bicycles, which is a service based business, you should be charging sales tax, at least in Utah.  Read on to find out why.  Not only that, but you may also be wondering about what rate you’re supposed to charge, what you’re supposed to do with the cash when your customers give it to you, and how you report it.  Have any of these questions popped up in your head?  If so, this post is for you.  Today I have the urge to talk taxes. Let’s get started.

What are sales and use taxes anyway? 

They are transactional taxes.  When certain transactions take place, the purchaser (your customer) has to pay a tax agency a required tax.  The business owner (you) is charged with collecting that tax from the customer, holding it in reserve, and filing it at the right time to the right tax authority.  It’s almost as fun as watching a slinky fall down the stairs.  If you don’t charge a sales tax when you are supposed to, then the purchaser is required to remit that tax on their own, and that is called a use tax.

We are looking at Utah here:

Sales taxes are different for every state so it can really be a headache to manage; especially if you’re business has several locations.  Since Dashboard Accountants is based out of Utah, we will be referring to Utah’s sales and use tax laws.  If you are doing business outside of Utah, please refer to your state tax entity for specific information.

So when do you have to charge sales tax?

There are a lot of different transactions that require you to charge a sales tax.  To see if the type of transactions your business generates is taxable, check out the guide from the Utah State Tax Commission at http://tax.utah.gov/forms/pubs/pub-25.pdf 

In general, some of the transactions that Utah requires sales tax on are:

·         Retail sales or purchases of tangible personal property within Utah.

o   i.e. selling a stereo

·         Rentals and leases of tangible personal property

o   i.e. the lease of a car

·         Labor to repair or maintain tangible personal property which includes maintenance agreements.

o   i.e. maintaining bicyces.

·         Labor to attach tangible personal property to other tangible personal property.

o   i.e. paying a company to attached your stereo to the hood of your car.  Don’t ask me why you would ever do this.

Some items that are not taxable are:

·         The sale of real property (land, homes, etc.)

o   If you are a contractor and you are building a home, then Utah considers you as the user of the materials and you will pay taxes on the materials to build the home.  However, the sale of the home to a homebuyer is not taxed.

o   Installation charges for permanently installing tangible personal property to real property. 

§  i.e. when you hire someone to install an A/C on your home, the purchase price of the A/C and the fee to install it are both no taxable.  The State of Utah sees this as though you originally bought the A/C with the home and therefore it is part of the real property.

·         Services that are not related to tangible personal property.

o   i.e. accountants.  Dashboard Accountants maintains the accounting records for small businesses.  Those books are not tangible, so you don’t pay sales tax.

Remember, there are a lot of rules here.  We have only covered a few today.  The next post is going to be on figuring out what rate you are supposed to apply to your sales.  We will be talking about a lot of things.  For example, does your business operate out of one location?  Multiple locations?  Does your business not have a specific location?  If so, what tax do you charge?  These questions will be answered in good time.

Good luck and if you have any questions, let us hear from you.  Happy taxing.

What goes up, must also go up

So in our quest to better understand what a debit and a credit is, we talked about the accounting formula: Assets = liabilities + Stockholders' Equity.  This formula must always balance.  In other words, you cannot have more assets that you do liabilities and stockholders' equity combined; they must equal.

The easiest way to remember what a debit is or does is to remember that when you debit an account on the left side of the equation ( i.e. your cash account or you debit accounts receivable or some other asset), the value of that account goes up.  When you debit something on the right side of the formula, the value (no necessarily the account balance) will go down. 

When you credit something on the left side of the formula, the value of the assets goes down.  When you credit something on the right side of the equation, the value goes up.  So, credits work in the opposite way that a debit does. 

Now I am sure that all of you who know a little about accounting are saying wait a minute, all of my expense accounts are on the right hand side of the equation under the Stockholder's equity title and when I debit them, the expense account gets bigger - that goes against everything you just said.  If you're thinking that, then you’re partially on the right track.  You're right that the expense accounts are on the right side of the equation under Stockholders' equity and you’re right that when you debit them the expense gets bigger, but remember what I said about how debiting anything on the right side of the equation will make the overall “value” of the right side go down (not necessarily the account balance).  When an expense goes up, that means that you are spending money and therefore the value of your equity in the company is going down. 

One more final rule is that whenever you make an entry, the debits must always equal the credits.  If you are using QuickBooks, you may never even see the words debit and credit.  That’s because QuickBooks is set up for the non-accountant and it does all of that fun stuff for you behind the scene.  Just know that it’s easy to get something wrong in QuickBooks and if you don’t know how to fix the behind the scenes debit and credit stuff, it’s a good to consult with your accountant.  If you don’t a small error will likely grow bigger and bigger.

I hope that this helps!  If you have specific questions, respond to the post and we will work them out together.  Good luck and happy counting.

Did it snow in here?

Alright, some of you may be saying, "Wait a minute...this blog used to be blue.  What's with all of the white?"  Well, I got some good feedback in the last post about how the blog was hard to read given the blue background and the white letters.  It never dawned on me that other people had to read this stuff.  Since we are up to an amazing 6 subscribers now, it’s time to make the site a little easier on the eyeballs. 

In case you are wondering, the feedback came from a guy named Ryan Money.  He is someone that I have really grown to respect.  He has done some amazing things in the entrepreneur world and I suggest you check out his blog at ryanmoney.com

Let’s get back to this accounting thing, shall we?  So we are talking about debits and credits.  Last post we established that when a banker says debit or credit, it doesn't always mean the same thing to an accountant.  To wrap your head around this, we need talk about a formula first.  Alright, after reading the word "formula" how many of considered closing down this blog and never coming back?   Don't let it upset you, it’s an easy one. 

Here it is:    ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY

See, I told you that it wasn't so bad.  This little formula is the most important formula you can memorize in the accounting world.  This equation says that your company has assets and that you paid for those assets in one of two ways; and most likely both.  Those two ways are liabilities (debt) and stockholders' equity (Your own money, investor money, and money the business has made up to this point).

Think of it like this - if you have $100,000 in assets and $60,000 in debt with the bank, the other $40,000 is money that you put into the business or its money the business made and has retained to pay for those assets.

The next post is going to tie this formula to those two funny little words we know as debt and credit. 

Until next time, happy counting.

Debit, debit, whos got the debit?

Well, I just got back from vacation.  My wife and I went on a cruise to Mexico for a week, so I am sorry that the blog has been vacant for a while. 

Well, it’s a new week which means a new topic!  If you have been following along, last week we talked about the difference between accrual accounting and cash basis accounting.  It was a roaring good time, but now we must move on.  I'll pause for a moment to let you dry your tears.....

And we are back.  This week we are going to discuss what debits and credits are.  You hear your accountants and bankers talking about them all of the time, right?  Did you know that when a banker says debit it doesn't always carry the same meaning our little accounting world?

Here is the problem with debits and credits – we’ve all been brainwashed by our bankers to think that a debit means something bad, i.e. taking cash out of the bank.  We have also been taught by our banking friends that a credit is good, i.e. cash going into your bank account.  Sound familiar?  If so, you have been brainwashed, but have no fear, we will sort it all out.

Check back tomorrow for the first part in our debits vs. credits talk!  If you have ever been confused by this topic, make sure not to miss it.

Accrual spotting, the new hobby

First there was train spotting, today we'll invent accrual spotting. I've never understood the draw to train spotting.  I've lived in England where a lot of people do it, and I just don't get it.  Anyway, let’s talk about what kinds of transactions would be directly affected by the accrual method and how to spot them. 

Some of the more common ones are:

Accounts payable, Accounts receivable, Payroll, insurance, interest expense, interest revenue, prepaid expenses, and unearned revenue.  There are of course many more instances that we could talk about, but one only has so much time, right?

So here is how to tell if we need to accrue something.  Ask yourself the following question, "During the course of the transaction, were actions take to generate an expense or to earn revenue even though cash never traded hands?"

Let’s look at payroll for example.  Let’s say that your employees work for you all during December and then get paid on January 5th for their work.  If your books are going to be correct, you need to show the payroll expense in December as well as an accrued payroll liability account.  So in this situation, something was done to incur expense, (employees did work for you), and you need to make sure that that expense gets put into the correct period that the work was performed.

So let’s get to the practical bookkeeping stuff now.  If you are doing your books, you need to always be aware of when things are happening.  When you sit down at your computer to enter the transaction, the accounting software is going to ask you for something called an "Accounting Date".  This is the date that you tell the accounting software to recognize when the expense was incurred or when the revenue was earned.  Do not confuse this with the payment date which is obviously when you make the payment in cash for the expense or receive payment for your work. 

So how do you keep track of when things are happening.  It's tough sometimes.  A business usually has several things going on at once and it is very easy to forget to make an entry one month.  What we do at Dashboard Accountants is make a list of all of the transactions that require us to make and adjust accrual entries.  We keep this list in excel and then each period, we refer to it to make sure that we haven't left anything out. You must also be vigilant with paying attention to the dates on invoices that you receive.  The company will usually put on the invoice when they did the work for you, which will help you out as your doing your data entry. As the superheroes of long ago would say on television, "It's a big job, but someone has got to do it."

You've never been to a meeting like this before

As the blog continues, you will see my passion for two things, accounting and entrepreneurship.  Now, I know that I am supposed to be writing about the whole accrual accounting thing like I said I would in my last post, but quite often I will also be sharing with you the little gems that I find in the entrepreneur's world, and this one is simply jaw dropping. The point of this blog is to help you improve your business and staying current on both accounting and entrepreneurship are vital in that arena. Check out how business meetings and eventually social events with friends and family of the future are going to evolve:

http://www.musionmedia.co.uk/cisco_day.html

I've jumped, now what?

Now that we have talked about the difference between this accrual and cash thing, I am sure you are all screaming from your roof tops "I am converted to accrual!  That's right world, accrual is my cup of tea!"  Well to your exuberance I say, “Welcome friend - you have made a good choice.”  Your next natural thought is probably along the lines of, "Alright, so I decided to do this accrual thing which is more difficult and time consuming...what did I just get myself into?" 

Have no fear.  Over the next few days, we’re going to talk about some of the practical things that you can do as the CEO to get things in order, and then you will truly experience what Dashboard Accountants works tirelessly to create for our clients...life as a HAPPY CEO.  That’s our job.  As a matter of fact, as I look at my clock right now, its 2:22 AM and I am so excited to tell you about this stuff! 

So here are some of the tips we will be covering between now and the next few blog entries:

-How to spot transactions that are directly affected by accrual accounting, and how to prepare for them.

-How to use Excel to your benefit.

-How to get your accounting dates right from the beginning.

-How to get over your fear of making this darn journal entries and adjusting journal entries.

Remember, if you have any questions or are totally stuck on an invoice give me a call at 801-678-3476.

Good luck and happy counting!

 

Did you say accrual or a cruel method of accounting?

It's no secret that business owners like the cash method that we talked about in the last post.  It's easy to do, however it’s not accurate in representing what your company actually did.  Some small business owners groan at the idea of switching over to accrual accounting and to them it's a cruel way to go.  But who says it has to be hard?  Today, we are going to talk about what accrual accounting is, and then tomorrow we will get into how to make it work for your business. 

The goal of accrual accounting:

Accrual accounting allows you to record in your books when a transaction occurred, not when the cash was received or paid out.  So, let’s talk about how this affects revenue first.  Let's go back to pops lawn shop for a handy example.  If they were to mow your lawn today, they would have performed a service that gives them a right to receive revenue.  Regardless of whether or not you paid them cash or paid them in a week, the lawn mower would go back to the office, tell the bookkeeper and the transaction would get recorded right then and there.  In this situation, there are two ways to record the transaction:

1.  If you paid cash today, the bookkeeper would increase the cash account (debit) and increase the revenue account (credit).

2.  If you didn't pay today, the bookkeeper would have to record a receivable from you.  The entry today would be to increase accounts receivable (debit) and increase revenue (credit).

Notice that in both situations we are increasing revenue.  That is because the revenue was earned today. 

Why is this important you ask?

Your books should paint a financial picture of your company's performance.  As a business owner, you need to know when your revenue was earned so that you can better see how the company is performing and therefore make better decisions. 

Let's look at expenses now:

Let's say that Pops lawn shop has to pay for workers compensation insurance for all of their employees working around dangerous equipment.  To make things exciting, let’s say that the company only pays for the insurance once a year on January 1st.  How do you make that entry? Well, under the cash method, you would have recognized the entire expense on January 1st because that was when the cash was paid out.  You would have increased your insurance expense (debit) and lowered your cash (credit) because you paid out money for the stuff.  Easy enough right?  It is, but it doesn't speak to what actually happened.  The employees of pop's shop didn't use all of that insurance on January 1st and then go uncovered for the rest of the year.  No, they used it every day.  So, to paint the right financial picture, you should slowly expense the money paid over the entire year. 

Here is how that would work:

January first rolls around and Pops insurance agent says, hey you owe $1,200 for workers comp for the coming year. Pop would then have to pay the full $1,200 upfront and the entry would look like this.  He would Increase a prepaid expense account (debit) by $1,200 and lower cash (credit) by $1,200. 

Now you’re thinking, “oh great, a net term.  What in the world is a prepaid expense account?”  Well, it’s an asset account on your books.  It says to whoever is looking at the books, "hey, we paid upfront for a service that has not been completed yet".  It's like putting money aside for a certain need the business has.

You may be asking, “Why are we not expensing any of the insurance?  Workers compensation is an expense right?”  Yes, it is an expense, but on January 1st we haven't used any of it because the year has just started. 

Once January is over, we will have used one month's worth of our insurance that we paid up front for.  Now we do a new entry.  At the end of the month we will increase our workers compensation expense (debit) by $100 and decrease the prepaid expense account (credit) by $100.  The $100 comes from the fact that we paid $1,200 upfront and we have used one month’s worth, or $1,200 / 12 months = $100 per month.

Now we are painting an accurate picture.  When you look at your financial statement, you as the business owner will be able to say, "I have used up part of my insurance, and it looks like I am covered through the rest of the year. I can also see how much insurance was used during January.”

Although it’s more work, accrual accounting is the way to go.  If you have a certain situation that your company is dealing with, feel free to respond to this post with your questions and we can talk about it.

Remember to check out tomorrow’s post.  I love looking at practical things a business can do to implement this stuff, and that is just what we will be doing.  I want to explore ways that a business can set up their accounting so that this accrual thing is actually easy to do.

Good luck!

Accrual what?

Well, since this is such a new blog, I don't have any subscribers yet which means that there is nobody to request that I write about a particular accounting topic that is giving them heartache.  I've spent a lot of time doing books and auditing companies all across North America and it seems like companies always have a difficult time with this whole cash vs. accrual thing.  So this week, we are going to talk about the difference, how it will affect your books, and how to set up your bookkeeping system to make it work for you.

Let’s figure out this cash word first and then we'll talk about accrual. 

These terms refer to how you are recording your transactions in your books.  A company can go down the cash road or the accrual road, but once a method is chosen, the company should stick with it.  You can change, but for the sake of consistency, don't unless you have good reason. In case you are wondering, most companies do the accrual thing. I run Dashboard Accountants on the accrual basis and it is much more accurate.  Let’s talk about what they mean.

Cash basis accounting:  Alright, put on your accounting caps and imagine with me a company that records transactions only when cash is received, or when cash is paid out.  Let’s do an example, shall we?  Let’s say pops lawn care shop mowed your lawn today.  What would that mean for their accounting records? 

1.  They did something that generated revenue for their company.

2.  While they did the service, they also incurred costs that they had to deal with.  For example, the cost of the guy mowing the lawn, the cost of gas in the lawn mower...etc.

3.  You had a service performed that you now have to pay for.

So, let’s say the guy’s packing up his lawnmower and then he knocks on your door to collect payment.  What you do next will determine how the accountant for pops lawn shop will record the transaction in the books.  You can do one of two things. 

1.  You can say oops!  Sorry, I don't have any cash.  Can I pay you next week?

2.  You pay the cash right there on the spot.

If you don't have cash, he will go back to the accountant empty handed.  Now, because cash was NOT received, the accountant does not record a thing.  A week later when you make your payment, the accountant will get the cash and then he or she will enter the transaction.  Remember, pops lawn shop is using the cash basis method of accounting so nothing was recorded until cash was received.  TO go along with that, the expenses incurred will not be recorded until pops cuts a check to the lawnmower or to the gasoline vendor.

Now assume you had paid your cash the day the lawn was mowed.  The accountant would have recorded the transaction that very day. 

So why do some companies use the cash basis method?  The only argument for using the cash basis is that it is easy to do.  You only record a transaction when cash is received.

Why do most companies use the accrual method (Which we will talk about tomorrow)?  The cash basis method doesn't represent what really happened.  That’s the problem.  If you as a business owner who want to make better decisions, you need to have financial statements that reflect what really happened.  If you are a business owner who does not want to make better decisions, stop reading…this blog is not your cup of tea.  Go play video games or something.  If you are still here, then well done!  You can add yourself to the elite group of business owners that care about their businesses.

So now you’re asking, “how is recording the transaction a week later inaccurate?”  Well, the answer is in the question; the service happened a week ago.  Humor me for a minute, but what if pops mowed the lawn on December 31st?  (Bad time to mow the lawn I know, but stick with me on this).  You would have done the work during one year, and then recorded the revenue earned and expenses incurred the next year.  That's a problem.  So, what’s the solution you ask?  Is your company recording transactions like pops?  Then tune in next time for the stunning conclusion to our discussion on cash vs. accrual;  Same blog address, same blog time.  I know you'll be waiting in shear suspense!

What will I get from subscribing to The Dashboard Digest?

I believe everyone has good intentions in life to start out with.  We commit to reading so many books a year, finally starting that college degree, or simply taking out the trash before we go to bed at night. Quite often, good intentions fall short of their desired outcome. As a fallible human being, I am no different.  Here are my good intentions for this blog, what I hope for it to become, etc. 

Nobody proffers when a professional uses words that other people don't understand.  It’s the classic case of going to the doctor, and instead of her telling you that you have a problem digesting your food, she uses words like gastrointestinal deficiency.  Every professional does it:  Accountants, Lawyers, doctors, etc.  After all, it’s job security right?  Well not here.  The Dashboard Digest is a place for both the experienced business owner and the one right out of the gates to subscribe and learn everything they can about accounting in the most user friendly way possible.  We have a policy of straight talking and simplicity.  So here's how it will work:

I am going to choose a topic that I see business owners struggling with on a daily basis.  Then I will write about it each morning from Monday to Friday (That’s the good intentions part.  If I miss a day or two, well I'm only human right?).  Each topic will be addressed for one week.  When I write about a topic, I will avoid the use heavy jargon.  I will use examples from my daily life to help the topic come across clearer.  I have also opened the blog for you as readers to make comments to each post or to ask me and the community on the blog questions. 

So, make sure to subscribe and tell all of your friends to subscribe.  Why?  Because almost everyone has wanted to own a business at one time and if that’s the case you need to be able to understand the language of business...numbers and accounting.  It will be one of those blogs with a purpose.  We will learn together, improve our businesses together, and hopefully you'll be able to sleep better at night when it comes to understanding the accounting that takes place, or should be taking place for that matter,  within your company.

So what’s next week’s topic?  Come Monday, we are going to start talking about why dates are so important.  I'm not talking about the ones with your significant other, stay with me everyone.  I'm talking about the Accounting Date you assign to an entry in your books.  It may not sound like a big deal, but it is.  If you get your dates wrong, your books are wrong.  There is something accountants like to call the "matching principal".  It’s the idea of matching up your revenue and expenses at the right times to reflect what actually happened.  So that's next week’s ditty of discussion. 

Speaking of taking your significant others on a date, I will be gone from June 1 to June 9.  My wife and I are going on a cruise!  I will be trying to blog from somewhere in the middle of the pacific ocean so forgive me if my posts that week are a little short. 

See you next week!