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Beating Up The Balance Sheet

Beating up the balance sheet is a term we use in Auditing.

How do you normally diagnose the financial health of your business?  Just run a P&L report, right?

Your cash flow is smoother than ever and your operating bank balance is steadily increasing, so you must be doing great, right?

Everything is actually so great that you decide to hire another employee or perhaps move into a larger, more expensive office space.

The next day, you log in to check your bank balance again and almost faint.  “Where did all my money go?”  Well, you probably forgot that sales tax was due on the 20th of the month, or that you have quarterly 941 deposit requirements, or that it actually takes some time for vendors to receive their checks in the mail and deposit them. This is the first lesson in why beating up the balance sheet is critically important to your business.

Alternatively, you may always find yourself scratching whatever hair is left on your head after your accountant prepares your income tax returns and determines that you owe thousands of dollars to our good buddy, Uncle Sam, despite your company never having more than $5,000 at any given time in the bank.

I’ve been through this conversation thousands of times and my answer is always the same…”Have you ever looked at your balance sheet?” – That’s another way of asking, “have you been beating up the balance sheet?”

I would argue that the balance sheet is the most important report for every company (especially accrual-based filers).  I am going to teach you everything you need to know in order to accurately identify the financial state of your business.  In order to accomplish that, we are going to be dissecting every section of the balance sheet.  We’ll be beating up the balance sheet every week, here. We are going to talk reconciliations, credit cards, paypal, cash, owner draws/distributions, equity, retained earnings, sales tax, loans, payroll taxes, and a bunch of other stuff that you probably don’t care about but need to soon (as in, like, now/immediately).

Oh, and one small disclaimer:  I am an avid and loyal Quickbooks Online and cloud accounting superuser.  I do not support any other accounting applications or desktop versions of Quickbooks.  The advice I provide in my column will serve you best in conjunction with your firm’s books on QBO.  The first step before you do anything should be to convert ASAP!

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Don’t Bank On Your Bank Accounts

Focusing on your bank balances as a guide for strong business performance can be misleading.

I want you to lose the habit of getting excited when you have relatively strong bank balances.

This convenience of liquidity can force you to make irrational and poor business decisions.  You have to ask yourself if this is truly a direct result of an increase in profit.

This is why it is so important to analyze your balance sheet regularly.

Did you recently get a loan?  Are you paying all of your expenses with a credit card or line of credit?  Are you incurring expenses with personal funds?  How much do you owe in sales tax at the end of the quarter?  What do your payroll liabilities look like?  What is the balance sitting in Accounts Payable?  Do you even pay your bills?   Did you receive deposits for jobs that you haven’t even started yet?

If you answered yes to one or more of any of these questions, then it is pertinent that you take a step back.

You really need to start focusing on the equity section of your balance sheet.  For starters, Assets = Liabilities + Equity.  Unfortunately, Assets does not equal Profit.  Your equity section will contain Net Income by default (which is your primary profit indicator) as well as other Owner/Partner Equity accounts and Retained Earnings (my favorite).   We will dig into all of these fancy accounts right here by yours truly but for now I want you to start programming yourself to shift your focus from the asset section and key in on your equity section (as it pertains to analyzing profitability) instead.  Of course, you still need to be concerned with cash flow so I am only speaking in terms of assessing the performance of your business.

As a result, you will become a smarter business owner.  You will eventually begin to understand the true key factors that drive the profitability (or loss) of your business and take action accordingly.  Doesn’t that sound much better than just getting another loan whenever you are tight on funds, just to keep the ball rolling and get your bank balance back to a decent size?  There are plenty of small businesses out there that carry an average of $5,000 in their primary operating account with extremely solid financials!

I admit though – having a large bank balance is nice!  However, last time I checked, I’m pretty sure interest payments (AKA throwing money out the window) and penalties for late filings (AKA throwing money out the window) are definitely not pleasant experiences.  Understanding the financial health of your business will help you avoid these depressing facets of owning a company.

Think Equity, not Assets!

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How To Properly Reconcile Paypal Accounts In Quickbooks Online

I have absolutely no idea how PayPal manages to sucker business owners into thinking it is beneficial to conduct business with a PayPal account. If you are using PayPal for personal transactions, it’s great!  However, when you start to incorporate Paypal into your business, it creates a severe headache for your bookkeeper. It can be a nightmare to reconcile PayPal accounts in QuickBooks Online.

Let me explain why it can be a nightmare to reconcile PayPal accounts in QuickBooks Online.

Over the past several years, technology has thoroughly enhanced the methodology of bookkeeping.  We are now equipped with bank feeds and automated rules to efficiently keep up with your financial transactions.  There are many powerful tools and applications that allow us to spend less time on manual data entry. Then we can spend more time on actually providing valuable, strategic advice. This helps you make better financial decisions.  Now you can begin to  see, essentially what separates an average,  diligent bookkeeper from a trusted advisor.

In the accounting world, PayPal acts no differently than a regular bank account.  However, it lacks the functionality that working with an actual bank provides. Moreover, PayPal impacts more than just an income/expense account and an asset (bank account).

When you pay a vendor from your PayPal account, it it creates a nightmare for us behind the scenes.

If you are like most PayPal users, you are probably carrying a $0 balance in your account.  When you pay a vendor, PayPal needs to pull the funds from somewhere a credit card or bank account (or both) serving as the funding source.  So this isn’t just a debit and a credit – it actually creates multiple transactions. Each transaction must be looked at separately when you reconcile PayPal accounts in QuickBooks Online:

  1. PayPal pulls funds from your bank or credit card account.  When you see this debit, don’t make the mistake of categorizing the expense directly from one of these funding sources.  You are simply transferring an amount from one balance sheet account to another balance sheet account.  If your bank account is the funding source, it should be booked as a transfer. The money flows from the bank account to your PayPal account (asset to asset transfer).  If your credit card is the funding source, it is a transfer from your credit card account to your PayPal account (liability to asset transfer).  If you have a personal bank or credit card account as the funding source, then you should do two things. Book an equity to asset transfer and then immediately STOP doing this!
  2. Now that you took care of the transfer, you can record the expense.  Simply debit your expense account and credit your PayPal (bank) asset account.
  3. Stop using PayPal to pay vendors.

If you are collecting a payment from a client through PayPal, it is pertinent that you follow these steps:

  1. Record the payment to “Undeposited Funds”.  This is essentially a suspense account designed for temporary use. I will discuss in more detail in a future post.
  2. Record a bank deposit to your PayPal account.  Select the payment from Step 1 (that is currently sitting in “Undeposited Funds”). Then record a negative deposit within your “Add New Deposits” section.  The expense account that you should use would be something similar to “PayPal fees” or “merchant account fees”.  Your negative deposit actually creates a positive expense.  Make sense?
  3. Stop using PayPal to collect payments from clients.

Following the above steps will make it possible to reconcile PayPal accounts in QuickBooks Online. Because PayPal is not actually a bank account, we don’t really have access to monthly bank statements. Therefore, I prefer to use the “Monthly Financial Summary” – but you have to be careful.  Unfortunately, there are other debits and credits that can generate discrepancies.  For example, there are PayPal non-posting transactions. Some examples include, Authorization holds, PayPal Cash Back Rewards, Disputes, etc. At least this report gives you an opening and closing balance, and a value to reconcile against.  Assuming you booked your expenses and payments correctly, you should tie out to the penny.

The two major keys to PayPal reconciliation success are to set up your PayPal account as a bank account. Then record your expenses, transfers and payments from clients correctly using the steps above.

As soon as you are finished reconciling your PayPal account to date, then do yourself (and your bookkeeper/accountant) a huge favor. PLEASE stop using PayPal!

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Ryan Balfe Appointed to Intuit Accountant and Advisor Customer Council

Ryan Balfe Appointed to Intuit Accountant and Advisor Customer Council

Select Panel Advises on Products and Services That Accountants and Their Clients Want Most

New York, NY – June 13, 2016 – Ryan Balfe has been named to Intuit Inc.’s (Nasdaq: INTU) Accountant and Advisor Customer Council. Intuit creates business and financial management solutions that simplify the business of life for small businesses, consumers and accounting professionals

A Founder and CEO of Cubepros, Balfe is one of 16 council members who will share their insights, experience and expertise to help Intuit develop new products and services for accounting professionals and small businesses. He has more than 10 years of cloud accounting, payroll, bookkeeping and financial management experience.

We’re excited that Ryan is joining our advisory council,” said Jim McGinnis, vice president of Intuit Accountant Segment. “Members of our council embrace and use online technologies to gain efficiencies within their practice and meet the unique needs of their clients. Ryan brings a combination of imagination, experience and practical counsel that will help us develop and deliver cloud-based products that accounting professionals need and want to better serve small businesses.

Balfe said he was excited by the selection,

As the leader in the financial software space, Intuit has revolutionized the methodology of full charge bookkeeping and accounting processes for small business owners across the globe.  With recent significant enhancements, Quickbooks Online now serves as the core hub to a robust and opportunistic ecosystem that promotes collaboration and back office optimization for business owners and their trusted accountants and advisors.  I am extremely honored to provide my voice as a strategic advisor in order to further enhance Intuit’s products and commitment to cloud technology and operational efficiency.

The council meets periodically at Intuit’s Silicon Valley headquarters to get an inside look at the company’s strategy and product development. Members participate for up to two years, sharing their thoughts and insights on critical accountant and small business tools.

About Intuit Inc.

Intuit Inc. creates business and financial management solutions that simplify the business of life for small businesses, consumers and accounting professionals.

Its flagship products and services include QuickBooks® and TurboTax®, which make it easier to manage small businesses and tax preparation and filingMint.com provides a fresh, easy and intelligent way for people to manage their money, while Intuit’s ProConnect brand portfolio includes ProSeries® and Lacerte®, the company’s leading tax preparation offerings for professional accountants.

Founded in 1983, Intuit had revenue of $4.2 billion in its fiscal year 2015. The company has approximately 7,700 employees with major offices in the United StatesCanada, the United KingdomIndia and other locations. More information can be found at www.intuit.com.

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Quickbooks Online Job Costing – The Negative Duplication Method to Labor Allocation


Quickbooks Online Job Costing – Negative Duplication Method from Cubepros on Vimeo.


Quickbooks Online provides simple job costing capabilities.  We are equipped with the functionality to tag revenue and expenses to a particular job so we can run a Profit & Loss report and gather profitability analytics by filtering on that job.  So then we can see how much we received and spent on that particular job.  This includes payments to subcontractors, supplies/materials, permits (and other legal fees), travel, etc.   Sounds simple, right?

Not so fast, unfortunately.

One thing we cannot yet accomplish is allocating labor costs to jobs.  If your employees spent time working on a specific job or project, these costs will not be reflected on your P&L.  From their timesheets, we can manually compute labor wages by multiplying employee hours by their hourly rate.  To skip this step, you can mark all employee timesheets as billable and run a “Time Activities by Employee Detail” report in QBO to see total hours and labor.  If you are OK with running two separate reports to view profitability by job, then you can skip everything below.

If you want to equip yourself or your manager with one-stop job profitability reports with everything under one roof, look no further!  Here is a super awesome and kind of weird workaround.  We will be using the power of negative multiplication in conjunction with timesheets, time charges, deposits and undeposited funds.  But don’t be scared, it will all make sense and work perfectly if you follow every step carefully.

For starters:  When we refer to jobs in Quickbooks Online, we are actually referring to sub-customers.  If you provide services to clients with multiple locations or are contracted for multiple projects with one client, set each location or project up as a sub-customer of your client (or customer).The Setup

Follow the five steps below in order to configure your QBO account properly.

Step 1:  Create a new expense account and name it “Allocated Labor”.

Step 2: Create a new product/service and also name it “Allocated Labor”.  Within the Sales Information section, select the “I sell this product/service to my customers” checkbox and choose the “Allocated Labor” expense account that you set up in Step 1 as your income account.  Also, make sure “Is taxable” is selected.

Step 3: Create a new sales tax account.  Click on Sales tax from your menu and then choose “Add/edit tax rates and agencies”.  Click New.  Select single tax rate and input “Allocated Labor” as your tax name and agency name and set your rate to 100%.

Step 4:  Go to Company Settings and click on the Sales tab.  Within the “sales form content” section, make sure that “Deposit” is enabled.

Step 5:  Also within Company Settings, click on the Advanced tab.  Within the “time tracking” section, make sure that “Add Service field to timesheets” and “Make Single-Time Activity Billable to Customer” are enabled.

That’s it!  The hard part is over.  Now on to actually allocating the labor…Time Charges and Labor Allocation

When your timesheets are marked as billable to a customer (or sub-customer), you will notice that a “time charge” will appear when you visit that customer’s account.  You have the option to convert these time charges to invoices and bill them back to your customer.   This is what we are going to use but we are not going to actually bill the customer.

Step 1:  Go to your customer (or sub-customer) account and select “Start Invoice” next to the open time charge.

Step 2:  Choose “Allocated Labor” as your sales tax account to calculate your invoice.

Step 3:  In your “Deposit” field, enter in the total amount of your invoice.  For example, if your time charge generated an invoice for 5 hours @ $15/hour for a total amount of $75, applying the Allocated Labor sales tax would yield a total invoice amount of $150.  This is the amount that you want to enter into your Deposit field, ultimately leaving you with a $0 invoice.

Step 4:  Because you indicated that there is a deposit, you will notice that a “Deposit to” box appears.  Choose “Undeposited Funds” and click “Save and Close”.

Step 5:  Create a bank deposit.  Select your customer (or sub-customer) from the “Select Existing Payments” section.  From the “Add New Deposits” section, choose your “Allocated Labor” expense account and enter in the amount that will convert this deposit into a $0 deposit.  So if your deposit from the invoice is $150, then your new deposit here would be -$150.  Also enable “Track returns for customers” and choose your customer (or sub-customer).  Click “Save and Close”.

Step 6:  Run a YTD balance sheet report and eyeball the amount sitting in your Allocated Labor liability account.  Create a journal entry crediting this liability account by this amount and debiting the Allocated Labor expense account.  Using our current example, your journal entry would credit your Allocated Labor liability account and debit your Allocated Labor expense account by $75.  Do not allocate a customer or sub-customer here!The Result

You will now be able to run a Profit & Loss report and filter on any customer (or sub-customer) and view a complete profitability report, including labor!  You will also notice that your overall P&L and Balance Sheet are not impacted whatsoever.  We created a $0 invoice, a $0 deposit and offset the balance in Allocated Labor on the P&L with the balance in the Allocated Labor liability account (on the balance sheet) via our journal entry.

Please feel free to drop us a line or comment if you run into any trouble and I’ll be glad to help.

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Converting to QBO

Converting your accounting system that you depended on for so many years can be scary.

Quickbooks Online ProAdvisor

Here we address four of the most common questions we receive from concerned companies like yours.  Feel free to post your question in the comments section below and we will answer it ASAP!

  1. Is there any chance that I lose my data when converting to Quickbooks Online?  None!  It is basically impossible.  You may notice a couple of discrepancies post-conversion (which can easily be fixed) but you can always go back to your desktop version if you decide QBO is not right for you.  You can take comfort in knowing that nothing is set in stone if you decide to try out QBO.  Intuit is constantly running free trials – so just give it a shot.  If you don’t like it, just let your trial expire and nothing will be erased in your desktop file.
  2. Is there anything that will not convert over to Quickbooks Online?  Unfortunately, yes but they can easily be added back in after the conversion.  If you have estimates in your desktop version, they will not flow through into QBO and must be added in manually.  If you only have a couple open estimates, then you can just manually add them into QBO.  However, if you have numerous estimates that are critical to your operation, you may want to consider using an importing tool such as Transaction Pro Importer.  Another issue you should be aware of is your sales tax setup.  You will need to verify the configuration of your Sales Tax Center within QBO.  The liabilities will be completely accurate if you check the register or balance sheet, but they will not be displayed in the sales tax center.   Every invoice that you have created in the past will convert over into QBO with sales tax displayed as a separate line item that links to your sales tax liability account (as opposed to being displayed as a calculation at the bottom of the invoice).  We recommend fixing each invoice for the current year by deleting the new sales tax line item and have each invoice recalculate the sales tax.  Doing this will rebuild your sales tax center!
  3. Will I need to set up payroll again when converting to Quickbooks Online?  Absolutely.  If you administer payroll through Quickbooks and convert to Quickbooks Online, you will need to activate payroll and will have to rebuild it from scratch.  You will need to reference your old payroll detail reports from your desktop version in order to successfully setup and run payroll with your new Quickbooks Online account.  You will also need to re-enter your federal and state tax identification numbers and rates and enter in all historical federal and state payroll tax payments.  Intuit’s Payroll system does an excellent job of helping you verifying everything is set up properly before you run your first payroll through QBO, so no need to panic!
  4. If I convert to Quickbooks Online, is my data secure in the cloud?  We have serviced hundreds of QBO accounts and have never once encountered a situation where data has been lost or compromised.  Intuit is a multi-billion dollar global powerhouse with over 8,000 employees.  Their servers are a lot more reliable than yours.  There is a 0% chance that you will ever experience a problem with losing data.  However, you ARE definitely at risk of losing your data from your desktop version.

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How to Avoid Paying Sales Tax

Calculating, paying and filing state sales tax can be extremely confusing for many businesses. The concept is quite simple, however.

obamataxes

For starters, sales tax is a liability and not an actual expense.  When it is finally time to file and pay your sales tax to the state, don’t get angry – it was never really your money to begin with.  You are simply required by law to apply your state’s sales tax rate to your invoices for services rendered.  Your customers are ultimately footing the bill.  The problem with many companies, especially those operating on a tight cash flow schedule, is that the money gets deposited into their account and most like co-mingled with regular business expenses.  This is why it is absolutely crucial to keep track of your sales tax liabilities on a regular basis so you can properly budget for it and have no surprises when it is time to pay up and file.   At any given moment, you should be able to peek at your balance sheet and see exactly the running amount that you owe to the state.

“As a business obligated to pay sales tax, you essentially serve as an intermediary between your customers and the state. Proper bookkeeping ensures that you will ultimately pay to the state the exact amount you collected from your customers during the filing period.”

Below is a checklist of four critical items to review each quarter (or month) to ensure you are calculating sales tax correctly and not pulling money out of your business by misreporting sales and deductions on your return.  As a business obligated to pay sales tax, you essentially serve as an intermediary between your customers and the state.  Proper bookkeeping ensures that you will ultimately pay to the state the exact amount you collected from your customers during the filing period.

  1. Do you file on a cash or accrual basis?  More than likely, the answer is cash.  If so, just make sure that your sales reports are not generated on an accrual basis.  You need to specify total gross sales on your return.  If you have a bunch of invoices created during the filing quarter that have not been paid by your customers, they will not show up as sales on a cash basis, but WILL factor into your gross sales on an accrual basis.  Additionally, do not just guess this number.  The state will compare your total gross sales amounts reported each filing period with your year-end income tax return.  These must match!
  2. Is your Accounts Receivable Correct?  Every month, you should run an A/R Aging Report (after your bank rec’s of course – see #4) to verify that everything looks correct.  If you see payments within this report, chances are you either never applied that payment to an open invoice or never created an invoice to begin with.  This is OK if you have not actually provided the service as of the last day of the filing period but – if the job is, in fact, closed – go back and create an invoice so you can apply that payment.  Otherwise, you will be under-reporting sales and will get penalized in the event of an audit.
  3. Are you recording refunds to customers correctly?  If you owe money back to a customer, chances are you’re simply writing them a check and recording the expense to an income account.  Don’t forget about the sales tax though!!  If a customer initially pays you $100 plus $7 for sales tax, $100 should go towards sales and $7 should be applied to your sales tax liability account on your balance sheet.  If you refund $107 back to the customer and apply it directly to an income account, you are miscalculating sales and may end up still paying the $7.  Also, never retroactively create a refund in your bookkeeping system.  The refund should always be entered on the date you actually refunded the customer.  Always check your sales tax liability register to verify that your payments to the state match the liability amounts accrued during the filing period.
  4. Are your accounts reconciled?  This is the bible for proper bookkeeping.  Every single penny going in and out of your business should be accounted for with 100% accuracy.  Otherwise, you may wind up accidentally inflating sales and paying more in sales tax (and income tax) than you should.   You may discover payments recorded that never actually hit the bank account (or invoices that were actually paid but never recorded in your system).  Also, if you receive a loan or make a personal contribution to the company, make sure none of this activity hits your P&L whatsoever – they should only be impacting assets, liabilities or equity on the balance sheet.  Also check to see if any refunds from your vendors were classified to the actual expense account and not recorded as income.

Utilize the Sales Tax Center in Quickbooks Online to diligently keep track of your sales tax liabilities and ALWAYS record your actual sales tax payments here and not directly to the liability account.  There should not be any expense accounts associated with sales tax.  If you think you may have misreported, overpaid or underpaid sales tax in the past, feel free to ask us questions in the comments section below or chat with us by clicking on the icon towards the bottom right of your screen.

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