What is Equity?

In previous posts, we discussed Assets and Liabilities. Now we will talk about Equity. When it comes to the three elements of accounting, Equity is actually pretty straightforward. It is the residual interest in the Assets of a company that remains after deducting its Liabilities. When you take the value of the business’ Assets and subtract the business’ Liabilities, whatever is left over is the Equity.

Example: Company car (Asset) valued at $15,000. Loan (Liability) amount at $10,000. The remaining $5,000 is Equity.

Another way to look at Equity is it being whatever is left to the owner(s) of a business after all Liabilities are settled.

Why is it important?

Equity tells you about your business’ finances. You can look at Equity over time and determine if you are making or losing value. From there you can make better decisions like whether to expand, if you should look at investing, or if you should look to be more conservative. Equity is also something investors and lenders will review when your company looks for financing options.

Types of Equity

The Equity portion of your company’s Balance Sheet is broken into several categories. These categories can vary depending on the entity type of your business.

1. Owner/Member/Partner Contribution - This is money you put into the business. If you buy a desk with personal funds, this is a contribution. The cash you invested to start the business is a contribution.

2. Owner/Member Draw or Pay - This is money you take from the business. When you pay yourself (AND YOU SHOULD PAY YOURSELF), this is a draw. This will be a negative amount as it is money leaving the business entirely.

3. Retained Earnings - This is the accumulation of all previous years net income that has not been paid out in dividends.

4. Net Income - Net income is what happens when you take Gross Income/Revenue (money made by your business) and subtract Expenses (money spent by your business). On the first day of the new tax year, Net Income is moved to Retained Earnings. Note: your accounting software should automatically do this for you.

The combination of these Equity accounts will give you your total Owner’s Equity.

Tips For Sole Props and Single Member LLCs

1. Be sure to have separate personal and business accounts. This includes checking accounts, savings accounts, and credit card accounts. Doing this will make it easier to do your books in general but, in regards to Equity, it will also allow you to better determine when you put personal money into the business and when you take money out of the business for personal use.

2. Put yourself on a pay schedule and pay yourself from the business account. Take that money and put it in your personal account. Using your business account like a personal account is a big “no-no” and a big headache when it comes to your bookkeeping. Paying yourself what you're worth is not only important for your morale but also will allow you to separate your business and personal expenses. Also, it will allow you to more accurately track your Owner/Member/Partner Draws and Contributions.

3. On the 1st of the new year, create a Journal Entry in your accounting software to move your Owner Draws balance to your Owner Contribution account. You do this because  you want to be able to see what your Owner Draws are every single year.

That’s the skinny

Equity is your stake in the company. It is the remaining value of the company when you’ve settled all its Liabilities. It is key to understanding your business’ financial health and in determining how to move forward when making business decisions. It is also a factor when looking at finance options with lenders and investors. Make sure you have processes and practices in place that will help you keep Equity accounts tracked accurately and timely. Remember, if this is something you would prefer to leave to a specialist (aka a Professional Bookkeeper), feel free to schedule a free consultation!

Your Business' Liabilities

Liabilities are one of the three foundational components to business bookkeeping. They are what your business is financially obligated to pay. They can take the form of services owed or money owed. Simply put, they are what your business owes customers, employees, or vendors.

Why Are They important?

Owing money is not a bad thing. Sometimes loans are required to purchase assets. Liabilities can give small businesses the funds need to operate and grow their business. However, you want to ensure you do not take on too much liability as a business. You should always have enough value in the Assets of your business to offset the cost of your business’ Liabilities. Understanding your businesses Liabilities is key to managing money and maintaining a financially healthy business.

What Are Some Small Business Liabilities?

Almost every small business is going to have Liabilities. They fit into two categories, Current Liabilities and Long-term Liabilities.

• Current Liabilities - These are financial obligations due within 1 year.

Common Current Liabilities

• Accounts Payable - This generally shows the amount your business owes other businesses for services or products provided. Think of a cell phone bill that has yet to be paid. Until it is paid, the amount owed is booked to Accounts Payable.

• Tax Liabilities - These are tax categories that are owed but not yet paid. Think of Sales Tax owed. Once paid, they move to Taxes Paid categories.

• Unearned Revenue - This is for payments received from customers for service in advance. If a customer prepays for an entire year of service, any amount for service in future months is unearned revenue. Once the revenue is earned, it moves to the appropriate income category.

• Credit Cards - Money owed on your business credit cards.

• Current Portion of Long-term Debt - This is the amount of principal on long-term loans due within the next 12 months. If you have 5 more years to pay off a loan, whatever is due within the next 12 months is reflected here.

• Long-term Liabilities - These are financial obligations that are not due within the next year.

Common Long-term Liabilities

• Notes Payable - These are loans to the business. This will be the total amount of principal due to lenders. I would recommend having a Notes Payable account for each loan to the business.

• Less - Current Portion of Long-term Debt - This account will be either $0 or a negative amount. It is the amount of Long-term Debt that will be paid within the 12 month. Note: this amount should be the negative equivalent of the Current Portion of Long-term Debt account.

Some Helpful Tips

In order to have accurate books, you have to be diligent with updating your bookkeeping records. The more you fall behind, the harder it is to catch up and ensure your books reflect your business’ finances accurately. Here are some tips to keep your books up-to-date:

• Record bills as they come in and record payment of those bills as they happen. Your accounting software should make sure your Accounts Payable is accurate as long as you enter the bills and payments as they happen. 

• When recording payments toward Loans in your accounting software, be sure to accurately input how much of the payment went toward the principal and how much went toward interest. This will ensure the Notes Payable balance is accurate and also record the interest expenses you accumulate.

Note: Some Credit Card companies may need you to record payments in your accounting software this way as well.

• Make an adjusting entry at the beginning of each month to show how much of your Long-term Debt is due within 12 months and how much is due 13 months and beyond. This will help you to accurately reflect what is your Current Portion of Long-term Debt and what is not. Keep your eyes open for an upcoming post on Current portion of Long-term Debt.

There You Have It..

That is Liabilities in a nutshell. They are one of the big three elements in bookkeeping for your business. Knowing what they are allows you to understand what they mean on your books. Accuracy in recording your liabilities is essential to managing your business’ money and ensuring it remains financially healthy. Be sure to record bills and their payments in a timely fashion, record principal and interest payments on loans accurately, and adjust the Current Portion of Long-term each month.

Keep in mind, as a bookkeeping professional I am trained in handling all aspects of bookkeeping, including Liability Accounts. Feel free to schedule a free consultation to see how I can make your life easier and offload your bookkeeping tasks.

Knowing Your Assets

There are three foundational elements to accounting: Assets, Liabilities, and Equity. All are important to understanding your business’ financial health and are key parts to your company’s Balance Sheet. We will explore each in separate posts but for now we will dive into Assets.

What Are Assets?

Assets are resources and property owned by your business as a result of business transactions. If the business buys a company car, the car is an Asset. It is important to accurately record the value of each Asset in order to reflect the true financial state of your business. This is particularly important when meeting with potential investors or looking to obtain business loans and lines of credit.

Assets are recorded at cost. If you buy a car for $10,000, the Assets value is $10,000. They are typically not adjusted for market value. Certain Fixed Assets, such as equipment and computers, will be depreciated over time and will be reported as less than their cost.

Types of Assets.

There are two categories of Assets: Current Assets and Fixed Assets. Each category has multiple sub-categories.

• Current Assets - These are Assets expected to be consumed, sold, or turned into cash within the current year.

  • Cash/Checking - money used to run day-to-day operations.

  • Accounts Receivable - money owed to your company for service or products already delivered (AKA unpaid customer invoices).

  • Inventory - the goods and materials that are in stock.

  • Prepaid Expense - Money paid for expenses not yet incurred. If you pay your insurance premium at the beginning of the year for the entire year, the portion for all months that have not passed is a Prepaid Expense Asset.

• Fixed Assets - These are Assets purchased for long-term use and not likely to be converted into cash within the year.

  • Intangible Assets - these include things such as copyrights, patents, lease rights, etc.

  • Tangible Assets - these include things such as buildings, land, equipment, computers, furniture, etc.

  • Financial Assets - these are things like long-term investments.

Bookkeeping and Assets

It is important to keep accurate records for your business. Here are some helpful tips on how to keep your Assets accurate on your books.

• Reconcile your checking and cash accounts monthly. In another post I will deep dive into reconciliation. Until then, note that it means matching internal documents with those of your financial institution. Reconciling will insure your Cash and Checking Assets are accurate.

• Be sure to match customer payments to their outstanding invoices. If you add a entirely new transaction as opposed to matching a payment to an outstanding invoice, you duplicate transactions. This fails to decrease the amount in your Accounts Receivable Asset. You do not want to show more payments owed than are actually owed.

• Set a reminder once a month to account for Prepaid Expense Assets. Go into your books and move the amount of the bill you prepaid for out of Prepaid Expenses and into the appropriate expense account. Here is a quick how-to for Quickbooks Online Users:

  • Click the “+New” button in the top left of the screen.

  • Click the “Journal Entry” option in the right column

  • Enter the date in the appropriate field (usually the end of the month)

  • In the “Account” Column of row 1, select the appropriate expense account.

  • In the “Debit” column of row 1, type the amount to be taken out of Prepaid Expenses.

  • In the “Description” column of row 1, type in notes telling you the reason for the entry.

  • In the “Account” Column of row 2, select the “Prepaid Expenses” account.

  • In the “Credit” column of row 2, type the amount to be removed.

  • In the “Description” column of row 2, type in notes telling you the reason for the entry.

  • Click “Save and Close.”

• Do not forget to depreciate your Fixed Assets. Check with your CPA to see which Assets require depreciation and how many years to depreciate them over (useful life). Then set another reminder to go into your books once a month and reflect the depreciation. Here is a step-by-step guide to recording depreciation in Quickbooks Online:

  • Click the “+New” button in the top left of the screen.

  • Click the “Journal Entry” option in the right column

  • Enter the date in the appropriate field (usually the end of the month)

  • In the “Account” Column of row 1, select the “Depreciation Expense” account.

  • In the “Debit” column of row 1, type the amount to be depreciated.

  • In the “Description” column of row 1, type in notes telling you which asset is being depreciated.

  • In the “Account” Column of row 2, select the “Accumulated Depreciation” account.

  • In the “Credit” column of row 2, type the amount to be depreciated.

  • In the “Description” column of row 2, type in notes telling you which asset is being depreciated.

  • Hit “Save and close.”

Also, here is an Easy Calculator to help you figure out how much needs to be depreciated monthly based on the Assets recorded value and useful life in years.

The Wrap-up

So now you know more about Assets as well as the different types you may see as a business owner. Simply put, they are the things your business owns. Accurate reporting of their value is important when it comes to understanding your business’ financial health, meeting with investors, or trying to obtain a loan or lines of credit. Be sure to be diligent and up-to-date on recording them to your business books.

Keep in mind, a bookkeeping professional is well versed in accounting for Assets. So if you want to save some time and have a little peace of mind, feel free to schedule a free consultation to see how I can help with your bookkeeping needs.

The Road to PPP Loan Forgiveness

You got the Paycheck Protection Program Loan (PPP Loan), you put it on your books, you recorded all your expenses, and now your 8-weeks are up. It is time to start down the road to loan forgiveness. Here’s what you need to make it happen.

Documentation

This is where having a plan in place to collect and keep any documentation that relates to the use of the PPP Loan funds comes in handy. This is a list of documents you will want to begin collecting and have ready for when you submit for forgiveness:

• Documentation of employees on payroll and their rates for the periods used.

• Payroll reports from your payroll provider.

• Payroll filings (Form 941)

• Income, payroll, unemployment insurance filings from your state

• Documents showing any retirement or health insurance contributions

• Documentation verifying utilities, rent and mortgage interest in place prior to 2/15/20

• Documentation verifying payment of utilities, rent, and mortgage interest (account statements, payment receipts, cancelled check).

Contact your lender to see if there are any other documents they will need to help in the forgiveness decisions. 

Application

Once you have collected the documentation, it is time to fill out the application and submit it to your lender. I recommend being in contact with your lender during this process. If they offer assistance in filling out the application, take full advantage.

Here is a copy of the Forgiveness Application pulled from the SBA website.

How to account for the forgiven amount

The bank will determine what is forgiven. Once a decision has been made, it will be time to add records to your Quickbooks Online so your books reflect lender’s determination.

Step 1: Add an income account to your Chart of Accounts called “PPP Loan Forgiveness - non-taxable”

• Find and click “Chart of Accounts” in the left menu under “Accounting.”

• Click “New” in the top right of the screen. 

• Under “Account Type,” select “Other Income.”

• Under “Detail Type,” select “Other Miscellaneous Income.”

• Under “Name,” type “PPP Loan Forgiveness - non-taxable.”

  Click here to see a screenshot of what your screen should resemble. 

• Click “Save and Close.”

Step 2: Create a journal entry to move the amount that was forgiven out of the loan account and into the other income account you just created. You do this because you no longer owe that amount and your books should reflect you had income (in this case non-taxable) coming from something outside the scope of normal business.

• Click “+New” in the top left of the screen. 

• Find and click “Journal Entry” in the menu options. 

• Under “Journal Date,” select the date of the loan forgiveness.

• Under the “Account” column in the first row, select “PPP Loan.”

• Under the “Debit” column, put the amount the loan is to be reduced (the amount approved for forgiveness).

• Under the “Account” column in the second row, select the “PPP Loan Forgiveness - non-taxable.”

• Under the “Credit” column, increase the income account the amount approved to be forgiven.

• Under the “Description” column, make a detailed note for the reason of the transaction.

  Click here to see a screenshot of what your screen should resemble. 

• Click “Save and Close.”

The amount forgiven is now no longer considered a loan to be repaid and your non-taxable loan forgiveness is reflected on your books.

What to do about the amount that was not forgiven

Hopefully you used your entire loan and all of it was forgiven. If that is not the case, you will still have a loan on your books that needs to be paid back. There is no early pay penalty. So, if you have the means to do so, feel free to pay off the debt immediately. 

If you do not have the means and must make payments, then remember to do so monthly and on time. When adding the payment to Quickbooks Online, be sure to have one line of the expense showing the amount going to the principal and the second line on the expense showing the amount going toward interest expense. Here’s a quick step-by-step on how to add a loan payment:

• Click “+New” in the top left of the screen. 

• Find and click “Expense” in the menu options. 

• Under “Payee,” type in the name of the lender who holds your loan.

• Under “Payment Account,” select whichever bank account you paid from.”

• Under “Payment Date,” select the date the check was written.

• Under “ Payment Method,” select “Check.”

• For the “Category,” select “PPP Loan.”

• Under “Description,” type in a description that makes it clear it is the principal portion of the payment.

• Under “Amount,” type in the amount of the payment going toward the principal.

• In the next row down, for the “Category,” select “Interest Expense.”

• Under “Description,” type in a description that makes it clear it is the interest portion of the payment.

• Under “Amount,” type in the amount of the payment going toward the interest.

• Be sure to note any reference numbers that will help with clarity.

  Click here to see a screenshot of what your screen should resemble.

• Click “Save and Close.”

That is how you go forward with the unforgiven portion of the loan. Make payments, be on time, and be sure to reflect the principal portion of the payment as well as the interest portion. Also, make certain you match these transactions when going through the checking account bank feed. Adding will cause duplication, matching will ensure clean and accurate books.

Parting words

Forgiveness of the PPP Loan is very much dependent on your ability to keep accurate records and provide the correct documentation. Put yourself in a position to maximize forgiveness by having a plan in place to follow the stipulations of the loan. Be sure to maintain accurate bookkeeping records. Collect and save ALL documentation that is relevant to the loan and the use of its funds. If you do all this, you will go into your forgiveness application process in prime position and minimize the amount you need to repay. After you know what is forgiven, follow the above steps to ensure the books reflect the action and begin paying off what was not.

Remember you can always reach out and schedule a free consultation to see how I can simplify your life when it comes to your business books.

How to Account for the PPP Loan in Quickbooks Online

So, you got approved for the Paycheck Protection Program Loan (PPP Loan). That’s great! This is an important and useful tool for you to keep your business in good shape during these unfamiliar times. Now what?

Now comes the critical work of adding the loan to your books and keeping accurate and efficient records on the use of the proceeds so you can minimize the amount you have to repay. In this post, I’ll give you the step-by-step guide to adding the loan to Quickbooks Online and recording expenses.

How to get it on the books

Time to make your books reflect the new loan and show an influx in funds. These are the steps to adding it to your Quickbooks Online.

Step 1: Bank account set-up.

Set up a new bank account. Some banks will require you do this. I recommend you do it regardless. Take the funds and put them in the new business account. Sync new account with QBO. Doing so will create a new asset account in your Chart of Accounts.

• In the menu on the left side of the screen, click “Banking.”

• Click the “Add Account” button in the top right of the screen.

• Find the bank where your new checking account was opened.

• Follow the prompts to securely log into your new bank account and sync it with Quickbooks Online.

• When given the option to select the type of account, select “Checking.” 

• Select the date you want to pull information to sync and click connect.

Step 2: Name the new checking account “PPP Loan checking.”

• In the left menu bar, find “Chart of Accounts” under “Accounting” and click.

• Find the newly created and synced bank account. To the right, click the drop down arrow next to “View Register.”

• Click “Edit” in the drop down.

• Find the “Name” field and rename the account “PPP Loan Checking.”

• Click “Save and Close.”

Step 3: Create a liability account for the loan.

You will have to create a new long-term liability account in your QuickBooks Online Chart of Accounts. Call this account “PPP Loan”

• Find and click “Chart of Accounts” in the left menu under “Accounting.”

• Click “New” in the top right of the screen.

• Under “Account Type,” select “Long-Term Liability.”

• Under “Detail Type,” select “Notes Payable.”

• Under “Name,” type “PPP Loan.”

  Click here to see a screenshot of what your screen should resemble.

• Click “Save and Close.”

Step 4: Create a deposit transaction. Be sure to select the “PPP Loan Checking” as the account receiving the deposit and the “PPP Loan” as the originating account.

This effectively increases the balance of your “PPP Loan Checking” within your bookkeeping system and puts the loan on your books.

• Click the “+New” button in the top left corner.

• Find and click the “Bank Deposit” option.

• Under the “Account” field at the top, select “PPP Loan Checking.”

• Under “Date,” select the date the loan proceeds were deposited.

• Under “Received From,” type in the name of the bank.

• Under the other “Account” field, select “PPP Loan.”

• Under “Amount,” type in the amount of the proceeds.

• Note any references you have where applicable.

  Click here to see a screenshot of what your screen should resemble.

• Click “Save and Close.”

There you have it. The loan is officially in your books and you are ready to start spending on qualified expenses.

How to log expenses

Create expense transactions in Quickbooks every time you spend money from your “PPP Loan Checking.” Make sure to only spend money from the “PPP Loan Checking” when it is on a qualified expense (payroll cost, business mortgage interest, business rent, or business utilities). This is the same process for creating expense transactions at any other time. Run payroll as you normally would, add a rent expense as you normally would, etc.. The only difference is which checking account you designate the funds being paid from.

Here is a run-through on how to add a rental expense.

• Click “+New” in the top left of the screen.

• Find and click “Expense” in the menu options.

• Under “Payee,” type in the person or business you or paying.

• Under “Payment Account,” select “PPP Loan Checking.”

• Under “Payment Date,” select the date the check was written.

• Under “ Payment Method,” select “Check.”

• For the “Category,” select the expense account that it belongs under.

• Under “Description,” type in a description that is clear.

• Under “Amount,” type in the expense amount the check was written for.

  Click here to see a screenshot of what your screen should resemble.

• Click “Save and Close.”

There is how you add expense to Quickbooks Online when using PPP Loan funds. Be sure to keep all records in regards to the use of the funds (receipts, statements, etc.) and to use the funds as outlined by the Loan Forgiveness Stipulations. Also, make certain you match these transactions when going through the checking account bank feed. Adding will cause duplication, matching will ensure clean and accurate books.

You are on your way!

Now you know how to record the PPP Loan and use of the funds in your books. You are well on your way to maximum forgiveness. If this all seems like a lot, remember, you can always schedule a free consultation to see how I might be able to ease the bookkeeping load for you.

In the next post, “The Road to PPP Loan Forgiveness,” we will discuss what is needed for loan forgiveness and the steps in Quickbooks Online to record when it happens.

The Deets on the PPP Loan

The Paycheck Protection Program Loan (PPP Loan) is in place to help provide your business with relief during the time of COVID-19. This low interest, 2-year loan has a possibility of forgiveness as long as certain stipulations are followed. In order to follow these guidelines, you must first know them in detail.

Forgiveness Stipulations

8-week Coverage Period: Any qualified expense incurred over your 8-week coverage period will qualify for forgiveness. Your period starts from the time you receive the proceeds.

Staffing and pay: You must maintain the total number of full-time equivalent employees on your payroll. There are some exceptions that can be made in circumstances such as firing for cause, voluntary resignation, voluntary reduction of hours, etc.. 

You must also maintain at least 75% of total salary to be assessed for each employee who did not exceed $100,000 in pay for 2019.

75% rule: This rule means 75% of the proceeds must go toward payroll cost. The other 25% may go toward other qualified expenses. This is a sliding scale up until the amount of the loan.

(Example 1: You get a $10,000 PPP Loan. If you use $7,500 toward payroll costs and $2,500 toward other qualified expenses, you should have the loan forgiven.

Example 2: You get a $10,000 PPP Loan. If you use $5,000 toward payroll cost and $5,000 toward other qualified expenses, you would have the $5,000 payroll expense + $1,666.67 of the qualified expenses forgiven. The rest would be paid back over the course of the loan period at the 1% interest rate).

**Note: Independent contractors do not qualify as a payroll cost.

Qualified Expenses:

Payroll costs - Salary, wages, commissions, vacation, family, personal, parental, medical or sick leave, health benefits. These are incurred during the 8-week coverage period. If wages are incurred but not yet paid when the period ends, it's still forgivable as long as it is paid on the next regularly scheduled pay date.

Business mortgage interest (not principal) - If the mortgage is a business expense and was signed prior to 2/15/20. This must be either paid or incurred during the coverage period and paid on or before the due date.

Business rent - As long as the lease was in effect prior to 2/15/20.This must be either paid or incurred during the coverage period and paid on or before the due date.

Business utilities - Electricity, gas, water, transportation, telephone, or internet access as long as service began prior to 2/15/20. This must be either paid or incurred during the coverage period and paid on or before the due date.

**SOLE PROPS & CONTRACTORS**

If your business is a sole prop or independent contractor with no employees, your PPP Loan and it’s forgiveness may look a little different than other types of business. 

1. Your loan amount was calculated by taking your 2019 net income, dividing it by 12, and multiplying it by 2.5. The amount is 10 weeks of income.

2. Your “owner compensation” is not to exceed 8 weeks of pay. Take your 2019 net income, divide it by 52, and multiple by 8. This will tell you how much of your loan needs to go toward paying yourself. 

3. The remaining proceeds can fit into other qualified expenses such as business mortgage interest, business rent, and business utilities.

4. Your qualified expense must be incurred over your 8-week coverage period that starts when you receive the loan proceeds.

Have a plan

Anything that falls outside of these guidelines will not be forgiven and will be considered a part of the 2-year loan with a 1% interest rate. I encourage you to know what qualifies and make a plan to ensure the maximum amount of loan forgiveness.

Take the time to do the math. Know how much needs to go toward payroll cost or owner compensation. Know how much you can put toward mortgage interest, rent, and utilities. Be prepared to adequately document and provide proof of use of funds. Collect and keep all payroll reports, receipts, invoices, account statements, and cancelled checks that come from the use of the loan proceeds. Once you have a plan, stick to it. Remember, you can always hire a bookkeeping professional to help execute your plan. Click here to schedule a free consultation.

To learn how to record and use the PPP loan funds in Quickbooks Online, check out the post “How to Account for the PPP Loan in Quickbooks Online.”

Getting to Know Your General Ledger

The General Ledger (GL) is one of the main components of a business' bookkeeping system. It is utilized every time a company records a transaction. Let’s dive in and take a closer look at the purpose of the GL and why it's so important.

What is the General Ledger?

The GL is the master document that shows all of your company’s financial records. It is where every single business transaction is categorized and summarized.

If your Chart of Accounts (CoA) is the list of folders your company uses to organize cash flow within the business, the General Ledger is the pile of records created by your business that need to be organized into the folders.

The GL is where you record your company’s transactions, the COA is how you organize them.

Why is the General Ledger important?

1. The GL is important because it is a full list of financial transactions your business has made for any period of time. It is a detailed list of your company’s activities and a one-stop-shop to find any transaction your business has performed.

2. Financial statements are used to help understand your business’ performance, financial health, and cash flow. They are generated from the information in your General Ledger. We will unpack financial statements in another post but the point here is, if viewing your financial performance is important, then the General Ledger is important.

3. The GL eases the investigation of possible accounting errors, such as income and expense discrepancies. If you notice you had a sudden spike in your office supplies expense when compared to previous months, you can dive into the General Ledger to either confirm each expense or correct the error.

4. When combined with a good Chart of Accounts, your General Ledger will provide a clear and accurate picture of your business’ performance which can be used to improve profit and minimize spending.

Accessing the General Ledger

So, how do you access it? If you are using accounting software such as Quickbooks or Xero, it is less a matter of accessing the General Ledgers and more a matter of running a report. You see, every time you record an invoice, bill, payment, sale, etc., the software records the entry into your General Ledger for you. You can then pull the software’s GL report when you need access for transaction confirmation or investigation purposes.

There are some exceptions which will require recording entries in your General Ledger when using accounting software. That is to say, your accounting software won't automatically record it into the GL for you. Long-term asset depreciation, allocation of prepaid expenses, and adjustments for current portions of long-term debt are some examples of such situations. When these arise you will need to record a Journal Entry (JE). We will discuss JE at another time but for now note that a Journal Entry is the actual act of recording a transaction to the General Ledger. Your software will provide you with the ability to add these to your books whenever it is required.

Worry Free approach to The General Ledger

If you don’t feel like worrying about your General Ledger, you can always hire a bookkeeper. They will take care of everything for you, including running financial statements, looking into discrepancies, and answering any questions you may have in regards to the GL.

In Summary..

Your General Ledger is your company’s financial records in full. It is where you categorize and summarize every single transaction it performs. It provides a one-stop-shop for you to see how your business is spending and making money over any period of time. With it, you can investigate errors and discrepancies. The General Ledger is used to generate your financial reports, providing a clear picture of your business’ performance and health. Use of the GL can be time consuming. If you find that you would like to spend more time in other parts of your business or personal life, feel free to schedule a no-cost consult.

Understanding Your Chart of Accounts

Time to get to know a little bit more about a topic at the foundation of your business’ finances: the Chart of Accounts (CoA). What is it? Why is it such a big deal? Lastly, what are some tips to get the best out of your business’ CoA? I will answer all of these questions, as well as provide you with a free Chart of Accounts Reference Guide to adapt and adjust to fit your business needs.

What is the Chart of Accounts?

The Chart of Accounts is a list of all the accounts a company uses to record transactions to its General Ledger. Your company can tailor this list as it sees fit to best suit its needs. 

A Chart of Accounts offers the ability to assign each business transaction to a particular category so you can see exactly where your company is making and spending money.

I like to think of these accounts as “folders”. When you define a business transaction as an expense or income, you must assign it to the correct expense or income “folder.” As property or cash moves in and out of the business, it too must be moved to (and from) the appropriate “folder.”

Why is the Chart of Accounts important?

The Chart of Accounts helps you organize how your business is making and spending money. Knowing which avenues of income are performing better allows you to make smarter business decisions about all of your revenue streams. Realizing where your money is being spent, gives you insight into where you could save or better allocate your funds. The more organized and accurate your Chart of Accounts is, the better equipped you will be to make sound business decisions.

What are some tips for Chart of Account success?

1. Most accounting software comes with a standard Chart of Accounts. Customize these to fit your business needs. No business is exactly the same. While businesses will have some of the same accounts in their CoA, there will be differences.

2. Be detailed yet concise when naming your accounts. There should be no guesswork behind which “folder” you should put a business purchase into. Simultaneously, you should not be so detailed that every purchase has its own “folder”. 

3. Make sure to have good definitions as to which account is used for what. This should be clear to anyone who is involved in categorizing transactions in your business books. Your bookkeeper should be on the same page defining any transaction.

4. Be consistent. The point of the Chart of Accounts is to make sound business decisions and to accurately see where your money is coming and going. The only way you can be accurate is to stick to your definitions.

Some Basic Terminology…

Now, before I give you the basic Chart of Accounts example, let’s take a look at each different type of account that will find its way into your business books. For simplicity, I broke them into categories according to the financial report in which they will appear.

• Balance Sheet Accounts

- Assets - These track the resources your business owns. This includes cash (both on hand and in the bank), land, equipment, inventory, or even trademarks and software.

- Liabilities - This is debt your company owes. Most of the time you will see “payable” in the account name. Notes payable, wages payable, accounts payable, etc.

- Equity - This is the owner’s stake in the company. Typical small businesses will see Owner Contribution (money or assets the owner gives to the business) and Owner Draw (money or assets the owner received from the company).

• Income Statement Accounts 

- Income (Revenue) - These accounts show how the business generates income. You will see accounts like Retails Sales Income, Service Income, etc.

- Expenses - These are costs that have been used by the companies as part of its main operating activity. Utilities, Telephone, Rent, etc. all fit under this category.

- Other Income (Revenue) - This is income outside normal operations of the business. Dividends Earned, Interest Earned, Credit Card Cash Rewards, etc.

- Other Expenses - These are costs the company used outside normal business operations. Home office expenses, Loss on Sale of an asset.

Each of these categories will have sub-categories. This is where being clear, concise, and consistent is key. You want to make sure your Chart of Accounts is accurate and detailed but also ensure it is not exhausting.

The big giveaway!

Here it is! The moment you’ve been waiting for: your free Chart of Accounts Reference Guide. This PDF is a great foundational tool for organizing and understanding your finances. Keep in mind, your business’ CoA will likely grow and change over time to perfectly fit your company needs.

Please note, next to each account title, I defined how to increase the balance of the account. You will also see a definition of what type of transaction would be assigned to this “folder.” 

Feel free to name accounts as you see fit. You can add and remove accounts for relevancy. However, as you do so, set guidelines as to what should be assigned to each account.

Click Here —> Free Download: Chart of Accounts Reference Guide PDF

Important message!

There is one last important piece of info I would like to share in regards to bookkeeping and the use of your Chart of Accounts. In order for books to stay balanced, there should always be at least 2 accounts from the CoA affected with every business transaction: something leaving the business and something coming into the business. Here’s an example:

Let’s say you purchase some business cards for $50 out of your business bank account.

You know that two accounts must show the transaction for your books to be balanced. One for the money leaving the business and one for the business taking on an expense.

The two accounts affected would be “Advertising/Marketing Expense” and “Bank”. Advertising/Marketing Expense goes up $50, Bank goes down $50.

It’s just that easy!

Parting words.

So there you have it folks, your business’ Chart of Accounts explained. I encourage you to analyze your business transactions. From there, create expense and income categories that will allow you to accurately track your finances. Use the free Chart of Accounts Reference Guide provided as a jump-off point and make it your own. Once you have these areas defined, you will be better equipped to budget your business expense allocation, set more accurate and achievable income goals, and have an overall better understanding of the health of your business.

If you’re not quite ready to tackle your books on your own or need some help with your existing books, feel free to reach out or schedule a free consult. I’d be glad to assist.

Small Business Resources to COVID-19 Relief

The government has introduced a number of measures to help support businesses throughout the Coronavirus crisis. With the speed of the situation, please visit this link for the most up-to-date information:

COVID-19 Small Business Guidance & Loan Resources

Relief Opportunities For Small Businesses

Below is a list of some helpful opportunities for small businesses. If needed, there is likely to be a loan your small business can use during the Coronavirus crisis.

This link is to a Forbes article that outlines multiple small business relief programs and is being updated frequently.

Economic Injury Disaster Loan Program - The Small Business Administration will work directly with state officials to provide loans to small businesses and non-profits. Businesses that have been impacted by COVID-19 can apply for a low-interest Economic Injury Disaster Loan through the SBA for up to $2 million.

Small Businesses in the following designated states are eligible to apply: Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Indiana, Louisiana, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, Washington, and West Virginia.

Check out the resource page for more details on the loan and areas it is available.

-or-

Click here to apply.

Even if you are denied a loan, you may still be able to receive a grant of up to $10,000 to cover payroll and other business expenses such as rent. Grants do not need to be repaid. Check out the resource page and application for more information.

IRS Payment Deadline Extension - Federal income tax payment and filing deadlines have been extended until July 15, 2020. See this page for more detail.

Payroll Tax Credits For Coronavirus Related Leave - Small and midsize businesses are eligible to take advantage of “two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees.”
There will also be a tax credit available for those who are self-employed equivalent to the sick leave amount.

For details, click here.

Unemployment For Small Business Owners and Gig Workers - With the passing of the CARES Act, unemployment has temporarily been expanded to include more people. Included in that group are self-employed persons and gig workers. If you are self-employed, you may qualify for state unemployment as well as $600 per week from the Federal Government for up to four months.

To apply for unemployment either visit your states unemployment website or contact them via phone. I encourage you to act fast but be patient. This kind of expansion takes time to set into motion.

Click here to read through some frequently ask questions about the CARES Act.

Stimulus Checks and Student Loan Payment Suspension - Also part of the CARES act is a directive to deliver a stimulus check to every American who has file taxes in either 2018 or 2019. The amount of this check may vary and will only be sent to individuals who have file taxes in either 2018 or 2019. To see more clarification click here for an article that answers questions about the CARES Act.

Federal student loan interest has already been temporary suspended, however, the CARES act has made it possible to temporary suspend you payment last on those loans. To take advantage, you must contact your loan provider. Click here for an article that answers questions about the CARES Act.

State Specific Resources - Please look into the state you operate in to see if there are any resources they are offering for relief efforts. Each state is different and may be offering assistance to small businesses in other ways.

This Forbes article does have a list of what some state/local governments as well as some private and non-profit companies are doing to help: Small Business Relief Tracker: Funding, Grants And Resources For Business Owners Grappling With Coronavirus. Click the article link to find out more.

I will do my best to keep this post as current as possible with new and/or update resources for small businesses being affected by COVID-19. (Updated 3/28/20)

6 Ways To Cut Costs For Small Business Owners

The Coronavirus is scary. People are getting sick, events are being canceled, we are asked to stay in our homes whenever possible, and businesses around us are temporarily closing doors. Social distancing is a smart tactic when it comes to minimizing the spread of this virus. “Flattening the curve” by staying away makes sense for the greater good. Unfortunately, that means that small businesses might take biggest hit.

If you are not already feeling the pinch of social distancing, there is a good chance you will in the coming days, weeks, or months. I am not saying this to increase fear but rather give you the motivation to think about your business and ways to ensure you can keep it alive should things get worse.

Below are 6 ways to help minimize some of the expenses of your business and ensure you maximize the profit and lifespan of the company you love.

1. Eliminate Excess Spending

   What are your non-negotiable expenses? For most companies rent, phone, internet, and energy are essential business expenses. There may be a few more items on the list that are a necessity for your business in particular, but those are the four bills you must pay.

   Outside of those, do what you can to spend little to nothing on other items. To cut costs you have to examine every purchase with a magnifying glass. Think, “do we really need another box of pens?” Buy what you need, when you need it, at the best price available. It is time to go back on a bootstrap budget.

2. Cut Printing Costs

   Did you know printing cost tends to be the 3rd biggest budget item for most businesses. Up to 3% of a business’ yearly revenue is spent on printing. To put that into perspective, if your company made $200,000 in 2019 then you spent roughly $500/month on printing alone. 

   You would think with all the technology we have at our fingertips we would be using paper less, however, paper usage in business is up 20%. Now is the right time to cut unnecessary costs and go paperless.

3. Minimize Travel

   Did you know that small business professionals travel more frequently and spend more on average in travel than those professionals associated with large businesses? Did you know the average professional who travels for business goes on one trip per month?

   According to Executive Travel, the average cost of meals, cars, and hotels for each day of a business trip is $325. That is not even including the $450 expense if you choose to fly. Couple that with the fact that each business trip lasts an average of 3 days and you have a total expense per business trip of $1425.

   I get it, travel can be a fun part of the job. Some may even say a perk. However, that is an expense that just might not be necessary. If you find yourself in a position to cut some costs, look to hold virtual meetings with cross country (even cross town) colleagues and clients. Find ways to explore other lines of communication aside from face to face visits until you can work travel back into the budget.

4. Explore Lower Phone Plans (and other monthly service bills)

   Smartphones are more a part of business today than they ever have been. Whether you use it for social media marketing, social platform advertisement, email, or payment processing, smartphones are a part of your business. However, there is still room to cut some costs.

   Call your provider and ask them to do a rate plan analysis. Plans are always changing and there may be a better one out there for your business needs. Have them look at your data usage to see if you can dial back your plan. Ask about autopay and paperless discounts. These can save up to $10/line on the account.

   Then take things a step further. Give a call to all of your monthly providers and see where you might be able to trim down your bills.

5. Sublet Extra Space

Do you have an extra room in the building or space you rent/lease? Put out an ad to sublet any unused (or unnecessarily used) room you may have in your space. Figure out the square footage of the room compared to the square footage of your entire space and charge the portion of the rent to the subletting individual.

Pro Tip: Be specific with your ad in regards to the professions you are seeking to sublet to. Make sure that it is a profession in a complementary industry to your own. This could lead to cross referrals and an overall mutually beneficial relationship for each of you.

Before I get to the sixth and final bit of advice, I encourage this as a last resort. Times may become difficult but we should always consider the wellbeing of our fellow humans to the greatest extent of our circumstances.

6. Reduce Employee Hours

This one sucks. I am not going to sugar coat anything. As a small business owner, your employees become family members. You put a lot of time, energy, and care into those you employ and see daily. Bottom line is that as a business owner, you may also have to make some tough calls in order to secure your livelihood and ensure your business stays alive.

Take a good look at the real needs of the business. Did you know 32-40 hours per week is considered full time? Maybe it’s time to drop people from 40 to 32 hours. At $12/hour, that leap alone could save your payroll expense $416/month/employee. Maybe you only need a part time associate with 25 hours. Now you are looking at $780/month in payroll savings.

Some difficult decisions may be ahead. I truly hope you do not have to make any that are too tough. Whether you are feeling the sting or not, starting today, put your business on a bootstrap budget. Only put money into items that are 100% necessary to operate. Cut printing and travel out of the budget and find creative ways to lower your expenses (like subletting that extra office space). There are other ways to cut costs, no amount is too big or too small. The sooner you lessen the money leaving your business bank account, the longer the money inside it will last.