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Get a Full Picture of Your Business with Accrual Accounting

Get a Full Picture of Your Business with Accrual Accounting

The cash basis of accounting is the method of recording revenue when cash is received and recording expenses when cash has been paid out. This method is easy and enables the business to legally manipulate taxable income. Paying less in taxes is as easy as spending more money.

The cash basis is common for small businesses that are not yet established. However, the Internal Revenue Service requires businesses to use the accrual method for inventories. As a result, some businesses adopt a hybrid basis where they use both the cash basis and the accrual basis. This is referred to as the modified cash basis of accounting.

Because there are so many advantages to using the accrual method, it makes sense to just commit to using the accrual method of accounting. We will explore what the accrual method is and why it makes sense to use it.

What is accrual accounting?

Accrual accounting is a method of accounting that records revenues when they are earned and record expenses when they are incurred, regardless of whether money has changed hands. The goal is to recognize related revenues and expenses in the same period. Accountants refer to this as the matching principle.

A quick example will better illustrate what this means. Your top salesman had a stellar month in January and sold $750,000 worth of merchandise, earning himself a commission of $7,500. Everyone hustled and it shipped by the end of January. The salesman was paid February 1. Under the accrual method the commission expense should be recorded in January, since the commission was for the sale generated in January.

What are the benefits of accrual accounting?

There are four major benefits to accrual accounting. First, the ability to match revenue with the related costs enables you to track profitability and better understand cash flow. As you track profitability, patterns will arise that will enable you to make better decisions. 

Second, it provides a more accurate picture of the state of your business than cash-based methods. The accrual method makes it easier to anticipate your expenses and predict sales. Being able to predict and budget are essential skills to be able to anticipate the needs of your business.

Because the accrual method of accounting provides a clearer picture of your business, many banks require financial statements to be prepared accordingly. This makes it easier to obtain credit and expand your business to meet market demands.

Third, it is compliant with Generally Acceptable Accounting Principles (GAAP). GAAP is a collection of accounting standards and industry practice that have been developed over many years. This one is huge because it puts everyone on the same page. Accounting is commonly referred to as the language of business. GAAP ensures that everyone is speaking the same language.

Last, GAAP makes it easy to answer the question “How are we doing?” Because GAAP creates one standard for everyone it makes it easy to compare the current period to past periods.

Even more, you can compare how you are doing to how others in the industry are doing. For example, pretend you are a producer of red wines. You can look up publicly traded wineries like Vintage Wine Estates ($VWE) or Willamette Valley Vineyards ($WVVI), which are both listed on the NASDAQ. Look up their statistics on Yahoo! Finance to get an idea of what how they are performing. Knowing how others in the industry are performing gives you an idea of what your numbers should be. 

Creating metrics to gauge your financial performance is a whole other—but exciting—conversation. To show you what is possible, $WVVI, who started publicly trading in 1994 enjoys a 10.28% profit margin. Whereas $VWE, who recently started publicly trading only enjoys a 4.52% profit margin. What does $WVVI know about wine making that $VWE is missing, as illustrated in the stark differences in profit margins?

 

Accrual Accounting and Protea Financial

Although accrual accounting takes more time because it can be complicated, the advantages outweigh the disadvantages. It enables you to track profitability and better understand cash flow, which provides a more accurate picture of your financial position. In addition to being compliant with GAAP, it also provides useful information for making business decisions about inventory purchases, investment opportunities, and financing needs.

Accrual accounting is more than cash transactions; it provides information about assets, liabilities, and earnings. Accrual accounting provides a better view of your overall financial position. Because the accrual accounting method is consistent with GAAP, the rules to prepare financial reports of both public and private companies are oftentimes a more accurate method for most companies.

For more information about accrual accounting or other business accounting basics subscribe to our blog for updates. 

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Outsourcing Accounting Services: Increase Your Bottom Line

Outsourcing Accounting Services: Increase Your Bottom Line

Outsourcing accounting services is a great way to save time, money, and your sanity. It can be difficult for many business owners to find the time or expertise necessary to keep up with all the paperwork that comes from running a successful company. We will examine how outsourcing accounting services can help you improve your efficiency and your bottom line.

 

You will have access to a team of experts

Accounting is one of the most difficult professions to master. Most accountants have many years of education, training, and experience. Many accountants work toward one or multiple certifications—Chartered Accountant, Certified Public Accountant, Certified Managerial Accountant, Enrolled Agent, or others.

Each certification is useful depending on whether the accountant wants to focus on financial accounting, taxes, auditing, or general business. Each certification has rigorous requirements that require many hours of study, experience, and testing.

In most cases, the requirements for certification are overkill for what is used in daily business life. So, if your accountant is not certified, it will likely not have an impact on their ability to have a drastic effect on the long-term success of your company. What it reveals is how serious the accounting industry is about producing talented accountants.

Also, accountants work with many businesses daily. By outsourcing your accounting, you gain the benefit of avoiding the mistakes that other businesses have made that your accountant has already solved. Accounting can be frustrating, so your accountant has had many wins in their career.  This shows that your accountant has the moxie and resolve to ensure the continued success of your business.

 

You can avoid the headache of hiring and training employees

For most small and medium-sized businesses, hiring and training a quality accounting team can be an expensive and resource-intensive process. Even retaining the best talent can be a headache. Because the needs of a business can change throughout the year, it is easy to adjust an accounting team through the outsourcing company.

By outsourcing your accounting, you are passing on headaches that would otherwise be yours and instead hand them off to an expert who specializes in accounting. This frees your time up to focus on core business functions that add value to your company. You are free to do what you are best at… while they do what they are best at—adding to your bottom line.

 

You will save money and time

They say that a penny saved is a penny earned. First, you will save on the large amount of money that goes into office facilities, software, office machines, and supplies. As briefly mentioned, not only will you bypass the headache of maintaining a staff, but you will also save on the salaries and payroll taxes of in-house accountants. By outsourcing, you will have access to the latest technologies and innovations without additional costs.

They will find money you did not even know you had. Did you know that when the coronavirus hit, congress passed several laws aimed at helping businesses survive the anticipated economic impact? If you did not know, your accountant did and already had several strategies on how to help you benefit.

Additionally, the tax laws change every year. By outsourcing your accounting, you will partner with accountants who are on top of these changes and help you get access to help and tax deductions that will enable you to thrive—especially during difficult times.

 

You will be up to date on your financial position

For simplicity, many small- and medium-sized businesses choose the cash basis of accounting. In essence, revenues are recognized when cash is received; expenses are recognized when cash is paid out. Although it saves time, you lose out on what your true financial position is. For example, if you prepaid some expenses—such as rent or insurance—you may have more cash available than you think you do.

An outsourced accounting team is likely to prefer to use accrual accounting because it gives insights into the financial health of a company. Accrual accounting recognizes and records transactions when they occur. For example, you buy a $20,000 distribution truck to be used for the next 10 years. Under the cash basis you expense $20,000 when purchased. This makes one year look bad and all the other years look good. Under the accrual basis, you would depreciate it as it is being used—over the next 120 months. As you are using the asset, you are likely generating a profit from using the asset.

An outsourced accounting team can create accurate and timely financial reports so you can predict future revenues and costs. This will help you make well-informed decisions for the long-term success of your business. With the accrual method all sorts of metrics are now available to tell you exactly how you are doing. Where performance is measured, performance improves.

 

Outsourcing your accounting services to a team of experts is a wise investment for your business. The right partner can help you increase your bottom line and avoid the headache of hiring employees. They will give you guidance on how to best manage risk in each area of business so that nothing falls through the cracks. You will be able to save time by not having to worry about staying up to date with technology and billing cycles.

Having an expert staff who has years of experience in the industry who is always looking out for ways to improve efficiency and reduce cost is one of the best ways to give your business a competitive edge. Having access to a team of professionals dedicated solely to handling all matters related to finance and taxes on behalf of your organization means you are better positioned not only from a risk management standpoint but also having funds available for other pressing needs within your company.

How to understand your balance sheet: A beginner’s guide

How to understand your balance sheet: A beginner’s guide

A balance sheet is a financial statement that provides an overview of the company’s assets, liabilities, and equity at a specific point in time. It is important to know what each one means in order to understand how well you’re doing. It can be difficult to understand all the information on this document, but there are ways to break it down into more manageable pieces.

 

What is a balance sheet?

The balance sheet is a financial statement that provides information about the assets, liabilities, and equity of a company.

The first section of the balance sheet lists the assets on hand. Assets are anything that can be turned into cash. Assets include cash, accounts receivable (money owed to you), inventory (goods waiting to be sold), and prepaid expenses (e.g., insurance that is paid annually in advance). Assets are usually broken up into short-term (less than one year) and long-term (one year and longer)

The second part lists liabilities, which are things you owe money for. Liabilities include loans payable or due for goods purchased on credit. Like assets, liabilities are usually broken up into short-term and long-term.

Finally, equity is calculated by subtracting what you owe from what you own. This is also referred to as net worth or the net value of the business.

 

The importance of the balance sheet

Balance sheets are a snapshot of what a company’s assets, liabilities, and equity look like at any given point in time. A balance sheet is a tool that can be used to find out if a company has enough money to cover its obligations and stay afloat or enough assets to cover its long term obligations.

The balance sheet can also be used to determine how a company is financing its operations. A company that is generating enough net income will have higher retained earnings from one year to the next. A company that is financed through debt will have an increase in long-term liabilities year-over-year.

 

How to read a balance sheet

Below is an example of a balance sheet.

balance sheet

We already explained assets, liabilities, and stockholder’s equity. The balance sheet must always “balance” because assets equal liabilities plus equity (known as the accounting equation). Understanding this equation helps you understand a company’s position. If the company has more liabilities than assets, then it will have negative equity, which is a potential major red flag especially with mature businesses.

Investors and creditors like to determine a company’s financial health using something called ratio analysis. To determine how liquid a company is, divide current assets by current liabilities. In the example above, 67,500 / 34,200 = 1.92. Whether that is good or bad depends on the industry. In general, anything near or over 2.00 is acceptable.

Other performance indicators include solvency ratios (also called financial leverage ratios), profitability ratios, efficiency ratios, and coverage ratios. Corporations also have market prospect ratios which are used to predict performance, which is imperative when valuing a company’s stock price.

 

How to use information from the balance sheet to improve your finances

Did you know the information found on a balance sheet can also be used to measure your company’s vulnerability to risk? A complete balance sheet includes key pieces of information like cash on hand, accounts receivable and inventory. By analyzing these numbers, you will be able to see where your business is strong or weak in relation to other companies in similar industries. If there are any areas for improvement (i.e., too much debt), it will allow you time to prepare so that when the unexpected happens.

If you want to take control of your finances and improve them, the balance sheet is a good place to start. Understanding what it includes and how to read one will provide insight into where you can make changes in order to get more money for yourself or avoid unnecessary expenses that are taking too much from your paycheck.

The best way to use this information is by comparing two different months side-by-side on paper so that you have everything at hand. Once you have done this, focus on adjusting only those areas which seem most important – like lowering debt payments or reducing inventory on hand – and see if there is an impact in your bottom line!

The balance sheet is a powerful financial tool that can be used to improve your finances. It’s important for you to understand how the information on the balance sheet works and what it means in order to make informed decisions about improving your money management skills. Let us know if we can help! Contact our team of experts today and let them show you how they have helped others grow their wealth with remarkably simple math.

QuickBooks Beginner Mistakes You Must Avoid

QuickBooks Beginner Mistakes You Must Avoid

If you’re familiar with QuickBooks Online, you know how spectacular it is in maintaining financial records for small and medium businesses. Whether you’re a business owner or an individual looking for reliable bookmaking software, QuickBooks is a great option.

However, there are some common mistakes beginners tend to make in QuickBooks Online. In this post, we are going to look at the most common mistakes in QuickBooks and how to avoid them.

If you’ve already made these mistakes, it’s your time to correct them. And if it’s your first time using QuickBooks, you’re in luck because you rectify can your mistakes without even making them!

 

Forgetting to Update the Records

This is by far the most common mistake QuickBooks users make. If you’re guilty of the same crime, it’s a good thing you’re not alone. With the fast-paced nature of today’s business world and the stress of managing everything, it’s fairly normal to miss a few transactions here and there.

However, these mistakes might become costly if not fixed immediately. When your QuickBooks records don’t match up with your bank statements, it means you are not on top of your organization’s finances.

To avoid such a rookie mistake, build up the habit of recording transactions when they happen. If it’s too much to ask, at least update the records at the end of the day.

 

Double Charge

Believe it or not, double entries are also very common among beginners. If you’re the conscious kind, you are more prone to making this mistake. Let’s look at an example.

Suppose, you went on a business trip at the beginning of the month and you spent from

quickbooks transaction

 your credit cards only due to a short in company accounts. Being a good businessman, you logged everything in your expenses tab as a business trip.

However, at the end of the month, when you are paying the credit card bills, you are also considering the ‘business trip’ from before. So, there are effectively two entries for the same expense.

It can cause you a lot of headaches. So, it’s always better to be careful when making entries. Label them clearly so they don’t create confusion for yourself.

 

Write Checks for Payrolls

If you’ve been using QuickBooks as a business owner, there is a good chance you use it for employee payroll as well. So, how do you pay the payroll taxes? If you’ve been using the Write Checks window, you’ve been doing it wrong!

When you use the Payroll function in QuickBooks, the payroll taxes are automatically filed in the Payroll Liabilities window. When you pay them through the Write Checks, the tracking gets all messed up.

So, only use the Payroll Liabilities to pay off those taxes!

 

Deleting Transactions

It’s another huge mistake made by rookie QuickBooks users. As QuickBooks does the job of central bookkeeping for your business, all of the transactions are interconnected across different accounts.

So, when you delete a transaction from one account, it affects the whole ledger. And at the end of the month when you finally sit down to make sense of things, the deleted transaction will cause you a lot of headaches!

So, if you absolutely have to delete any transactions, look for other entries that it might affect. For example, if you delete a transaction in one account, it will effect another account. So keep this in mind before deleting transactions.

 

Making Too Many Accounts

The sub-accounts feature is quite handy in QuickBooks to further organize the books. However, some users take the concept too far and open up accounts and sub-accounts for each of their expenses. If you can keep track, it’s all good.

The problem arises when you can’t. Introducing too many variables is a surefire way to confuse things. For example, do you really need sub-accounts like electricity, gas, etc. under the bills account?

It brings extra stress on your organizing skills. So, what you can do is chalk out a plan for your accounts before you make them. Make a list of the information that you actually need to know and start accounts from there.

So, delete any unnecessary accounts you may have now to tidy up your QuickBooks account.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Financial Forecasting 101

Financial Forecasting 101

If you’re a business owner or been thinking about opening up a new venture, the thought of improving its performance must have crossed your mind. And that’s where financial forecasting comes into play. 

It’s simply the process of looking into the future of your business based on historical data and trends. In this post, you’re going to learn the basics of financial forecasting and how it can help you.  

What is Financial Forecasting?

The definition is literally in the name. Financial forecasting is forecasting a business’s financial status. 

More specifically, this is the processing, predicting, and estimating the future performance of a business based on current data at hand. Company revenue is used as the benchmark in most basic cases. 

The sales figure can say a lot more than how much profit your business made. Those data sheets are effectively a portal to your business’s future. But it takes a different set of capable eyes to capture the essence. 

Apart from the current sales figures, historical data is also used in financial forecasting. It helps analyze the performance with regards to the past, present, and hopefully a better future. This method is widely used by successful CEOs and entrepreneurs around the world for its accuracy. 

Why is Financial Forecasting Important?

Any business with long-term objectives can definitely benefit from this process. It also helps to set new standards for the business as well as guide the decision-making process. 

Another very important reason why entrepreneurs use this process is to convince investors. 

Suppose, you own a winery and you wish to expand across different states. You know it will be a successful venture. But how do you attract more investors? 

That’s where financial forecasting comes to play. You can accurately determine the future of your winery by considering all the variables in your current model and projecting them into a future scenario. 

CEOs love this model because it can bring important insights such as how to spend business resources, what the industry holds for the future, how long the debts will hover over the business, how to pay the shareholders, etc. to light. 

And when you have at least an idea of what you’re diving into, making the right decisions at the right time becomes a lot less burdening to your shoulders. 

Types of Financial Forecasting

When venturing into the dynamic world of forecasting, you should know about the types as well. There are two major branches of forecasts. One is Qualitative while the other one is Quantitative. 

Qualitative Forecasts 

Qualitative financial forecasting does not rely on computers to analyze large data sets. It’s quite an unorthodox way of finding out the connection between events. Rather than following the sales figures, Qualitative Forecasts focus on decisions taken from experience and intuition. 

It starts with gathering opinions from major positions in each department. Analyzing their insights might be crucial for forecasting.

The next step might be taking a similar scenario from a different environment and projecting it onto the subject scenario. 

The Delphi Method is another important aspect of financial forecasting. It indicates that company professionals fill out a questionnaire. Based on it, another questionnaire is created and filled. Now, these are combined and presented to the participants to re-evaluate their answers. 

Scenario forecasting is another great method. The person tasked with the forecasting will project different results based on the consequence of scenarios. Your management team has the freedom to select any result you want. 

Quantitative Forecasts 

Unlike qualitative forecasts, quantitative financial forecasts solely depend on large historical data sets. These are used to find patterns and trends in the business space. These forecasts are more accurate in sectors where numbers speak louder than legacy. 

Pro-Forma Financial Statements is a great method used in this forecast where the sales data from the previous years are used to make the prediction. 

Another method is Time Series Analysis. For short-term goals and objectives, this the perfect method to use. It involves collecting data for a certain period and analyze it to find trends. 

Lastly, the Cause-Effect method dictates that every effect on the business is related to the cause. The consumer’s income, their confidence in the business, unemployment rate, etc. directly influences the sales figures. The goal of this method is to find the connection.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.