Accounting Methods For Your LLC

By Mark A. Thomas 

Keeping up with your accounting is an important part of any business. Your LLC cannot thrive if you don't have a solid method to track your income and expenses. The two principal methods are the cash method and the accrual method (sometimes called cash basis and accrual basis). Before you can choose the right method for your LLC, you should know the advantages and disadvantages of both. The two methods don't change your income or your expenses, just the timing on when they are credited and debited to your accounts.
The cash method is the method used more commonly by small businesses like your LLC. If your limited liability company uses the cash method you will not count income until you have received the actual cash or check, and you will not count expenses until they are paid.
If you opt to use the accrual method when you form an LLC, you will record entries a bit differently. Using the accrual method, income is counted when you make the sale and your expenses are recorded when you receive goods or services. You are not waiting until you receive or make payment before recording the transaction. Let's take a look at a couple of examples.
Income. Your landscaping LLC completes a job in June but the client does not send you a check until September. Under the accrual method you would record the income in June. But, with the cash method, you would not record the income until you received payment in September.
Expenses. You purchase a new computer for your LLC in March and pay for it in May. Under the accrual method you record the expense in March when you took possession of the computer. If your business uses the cash method you would record the expense when you make the payment in May.
If you choose the accrual method for your LLC how do you determine the transaction date? It can be difficult if the sale occurs on one date but it takes time to complete the job. You record income when you complete the service or deliver all the goods. The same applies for expenses. You record the expense once the service has been completed or all goods have been received and installed, if necessary.
If your LLC (or corporation) has sales of less than $5 million per year, you can choose to practice either accounting method. However, you must use the accrual method if:
• You have sales greater than $5 million per year
• You stock inventory that you will sell to the public and your gross receipts are greater than $1 million per year.
There are advantages and disadvantages to both methods. The accrual method is great for a big picture view of income and debts but could mask a cash flow problem. In reverse, if your LLC uses the cash method you may have a good accounting of cash on hand but you have to be cautious of painting a misleading picture of your long term profitability.
Your taxes are impacted based on which method your LLC uses. If you incur expenses in one year but do not pay them until the next year, under the cash method you would have to wait until the year you paid the expense to take the deduction. If your limited liability company opts to use the accrual method, you could claim the deduction in the same year you incurred the expense even if you do not pay the expense until the following year.
Click here to learn more about forming an LLC: http://www.ezonlinefiling.com/form-an-llc-2.php
By Mark Thomas

Mark Thomas: Mark has served in various roles in corporate America over the last 25 years, most notably in charge of large organizations with over 1000 employees. During this time, he has also owned several small businesses and has developed a keep awareness of how different the two worlds are and the special challenges faced by entrepreneurs. Because of his background, Mark is able to bring a unique perspective to new business owners and his addition to our team has all of us excited. Look for his posts to cover anything and everything related to business. He has also said that he is looking forward to hearing questions and comments from you, so please leave comments!

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Accounting Methods

By Zeshan Momin  

An accounting method is the method that a company or individual chooses to book transactions and prepare financial statements. There are two types of accounting methods: cash basis and accrual accounting. The main difference between the two is the way the company books the receipt of and the paying of cash from the business. The choice of accounting method can lead to very different looking financial statements.
Cash basis accounting
Companies that use the cash basis accounting method book their income when they actually receive the cash and not when they conduct the transaction. They also book expenses when they physically pay the cash rather than when the transaction was conducted. Let's take a look at an example; Company A uses the cash basis accounting method. They enter into a contract to buy 100 widgets for $1 each on May 1st. The widgets are delivered the same day but the invoice is not due until May 31st. In this example, May 1st is the date they entered into the contract and received the goods, while May 31st is the date that will actually be recorded in the accounting books of the company since that is the date they actually paid the cash. Cash in this sense does not only mean the paper money, it means any liquid (easily transferable, widely accepted form of payment) form of payment which can include checks, and other liquid financial instruments. Usually one will find sole proprietors and other small companies employing the cash basis accounting method.
Accrual accounting
Companies that use accrual accounting method book their income on the date of the transaction rather than the date of receipt of cash. They also book their expenses on the date of the transaction rather than the date of payment of cash. In other words, the company would record the transaction when the work was completed and not when the payment was made. Using the same example above, if Company A used the accrual accounting method it would book the expense on the date it entered into the contract and received the widgets- May 1st. It would still make the payment on May 31st as instructed in the invoice. Medium to large sized companies usually use the accrual accounting method. This method is best suited to meet the GAAP (Generally Accepted Accounting Principles).
The impact of each method on financial statements
Depending on which accounting method a company uses, the financial statements can look quite different. The difference comes when there is a difference in the period of receipt/ payment of cash and the period of the completion of the transaction.
In cash basis accounting the income and expenses are rarely matched every month. It is harder to track the differences than in accrual accounting. For example, Company A can enter into a contract to buy 100 widgets on December 20th and receive them the same day. Company A would then make the payment on January 10th the following year. In this case there is a difference in the month of the transaction and in some cases (depending on the fiscal year- more on that in another article) there is a difference in the year of the transaction as well. Company A would receive the goods on December 20th and record the transaction on January 10th. This affects the tax bill as well (in some cases positively, in other cases negatively). There is another possible benefit in employing cash basis accounting. This accounting method is very good in keeping track of cash.
In accrual accounting, the company is able to match income and expenses which allows it to keep track of and have a better understanding of the health of the business. Using the same example of Company A, we can see that the transaction would be recorded on December 20th (not January 10th). The company would make entries in expectance of the payment on January 10th. This way, at the end of the year the company and its stakeholders have a better understanding of the health of the company. However, in this method the company has to engage in some extra procedures to track its cash movements.
There are a few other ways that the two methods impact the financial statements of companies, but these are out of the scope of this article as this was only meant as a primer into the subject.

Zeshan Momin has considerable experience in Accounting and Finance. He is a consultant that helps companies manage their foreign exchange risk exposure. His other interests are electronics, specifically electric testing products like the Fluke 87.

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Advantages of Factoring Companies to Business

Advantages of Factoring Companies to Business
By Aaron A Almus

Factoring is also termed "debt factoring" or "invoice factoring". This is a type of business financing where firms whether small business or start-ups sell their invoices to a third party. The third party would then process their invoices and allow the former to get their revenues before actual payment has been made to them by their clients. This is the factoring business in a capsule.

Factoring companies give businesses a massive and immediate boost in their cash flow. This is very important for companies who didn't start with a huge working capital.

Some of its advantages are:

• It is an inexpensive way to outsource sales ledger thus giving the proprietor more time to oversee the business operation.

• Cash flow and financial planning systems of a company run smoothly.

• Customers give high regards to factors thus they pay up their debts quickly.

• Factors may also loop you into some useful information about your customers like their credit standing. This allows you to position and negotiate better terms with your suppliers.

• Factors provide quick cash access as soon as the receivables are invoiced.

• Factoring companies can be maximized as a good resource for business expansion.

• Factors may also help you avert bad debts through non-recourse factoring.

Now if you find that your business needs some or all of the service benefits derived from invoice factoring, then let's find out what factors consider before they take a firm into their account.

Generally, the requirements to apply for a factoring service vary per companies. We can only provide an indication that a firm qualifies as there is no rigid list. There are even circumstances that a firm who did not meet any of the indication was still able to get a factoring account.

Most of the firms that factors work with are those with at least an annual turn over of £50,000. Of course, there is consideration to this. They might also work with start-ups and smaller business. Factors also prefer of the firm has a relatively huge or diverse customer base. They may not be as generous in terms of funding if let's say, the firm's customer base is highly monopolized or dominated by a single customer. Next, the firm's debt must be simple and non-contractual and can easily be proven. Lastly, the firm must preferably have low levels of debt not less than 90 days over due.

There are things that diminish one's appeal to factoring companies. One is the firm's involvement in public sales. Only sales for commercial customers are preferred. Too many small invoices, disputes and queries harm a firm's standing in the eyes of factors. They also inspect firms to see if they characterize a sound, reputable and trustworthy company. If the firm interested in factoring has a questionable reputation then no agreement would be reached. Complicated contractual terms or warranty stipulations may also disqualify the interested firm.

To further explore business factoring, Aaron A. Almus recommends you to browse through http://factoringbusinesses.com/factoring-business-opportunities/

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Making a Profit

Making a Profit
Accountants are responsible for preparing three primary types of financial statements for a business. The income statement reports the profit-making activities of the business and the bottom-line profit or loss for a specified period. The balance sheets reports the financial position of the business at a specific point in time, ofteh the last day of the period. and the statement of cash flows reports how much cash was generated from profit what the business did with this money.

Everyone knows profit is a good thing. It's what our economy is founded on. It doesn't sound like such a big deal. Make more money than you spend to sell or manufacture products. But of course nothing's ever really simple, is it? A profit report, or net income statement first identifies the business and the time period that is being summarized in the report.

You read an income statement from the top line to the bottom line. Every step of the income statement reports the deduction of an expense. The income statement also reports changes in assets and liabilities as well, so that if there's a revenue increase, it's either because there's been an increase in assets or a decrease in a company's liabilities. If there's been an increase in the expense line, it's because there's been either a decrease in assets or an increase in liabilities.

Net worth is also referred to as owners' equity in the business. They're not exactly interchangeable. Net worth expresses the total of assets less the liabilities. Owners' equity refers to who owns the assets after the liabilities are satisfied.

These shifts in assets and liabilities are important to owners and executives of a business because it's their responsibility to manage and control such changes.  Making a profit in a business involves several variable, not just increasing the amount of cash that flows through a company, but management of other assets as well.

Personal Accounting

Personal Accounting
If you have a checking account, of course you balance it periodically to account for any differences between what's in your statement and what you wrote down for checks and deposits. Many people do it once a month when their statement is mailed to them, but with the advent of online banking, you can do it daily if you're the sort whose banking tends to get away from them.

You balance your checkbook to note any charges in your checking account that you haven't recorded in your checkbook. Some of these can include ATM fees, overdraft fees, special transaction fees or low balance fees, if you're required to keep a minimum balance in your account. You also balance your checkbook to record any credits that you haven't noted previously. They might include automatic deposits, or refunds or other electronic deposits. Your checking account might be an interest-bearing account and you want to record any interest that it's earned.

You also need to discover if you've made any errors in your recordkeeping or if the bank has made any errors. 

Another form of accounting that we all dread is the filing of annual federal income tax returns. Many people use a CPA to do their returns; others do it themselves. Most forms include the following items:

Income - any money you've earned from working or owning assets, unless there are specific exemptions from income tax.

Personal exemptions - this is a certain amount of income that is excused from tax.

Standard deduction - some personal expenditures or business expenses can be deducted from your income to reduce the taxable amount of income. These expenses include items such as interest paid on your home mortgage, charitable contributions and property taxes.

Taxable income - This is the balance of income that's subject to taxes after personal exemptions and deductions are factored in.

Bookkeeping Basics

Bookkeeping Basics
Most people probably think of bookkeeping and accounting as the same thing, but bookkeeping is really one function of accounting, while accounting encompasses many functions involved in managing the financial affairs of a business. Accountants prepare reports based, in part, on the work of bookkeepers.

Bookkeepers perform all manner of record-keeping tasks. Some of them include the following:

-They prepare what are referred to as source documents for all the operations of a business - the buying, selling, transferring, paying and collecting. The documents include papers such as purchase orders, invoices, credit card slips, time cards, time sheets and expense reports. Bookkeepers also determine and enter in the source documents what are called the financial effects of the transactions and other business events. Those include paying the employees, making sales, borrowing money or buying products or raw materials for production.

-Bookkeepers also make entries of the financial effects into journals and accounts. These are two different things. A journal is the record of transactions in chronological order. An accounts is a separate record, or page for each asset and each liability. One transaction can affect several accounts.

-Bookkeepers prepare reports at the end of specific period of time, such as daily, weekly, monthly, quarterly or annually. To do this, all the accounts need to be up to date. Inventory records must be updated and the reports checked and double-checked to ensure that they're as error-free as possible.

-The bookkeepers also compile complete listings of all accounts. This is called the adjusted trial balance. While a small business may have a hundred or so accounts, very large businesses can have more than 10,000 accounts.

-The final step is for the bookkeeper to close the books, which means bringing all the bookkeeping for a fiscal year to a close and summarized.

Profit and Loss Finance

Profit and Loss Finance
It might seem like a no-brainer to define just exactly what profit and loss are. But of course these have definitions like everything else.  Profit can be called different things, for a start. It's sometimes called net income or net earnings.  Businesses that sell products and services generate profit from the sales of those products or services and from controlling the attendant costs of running the business. Profit can also be referred to as Return on Investment, or ROI. While some definitions limit ROI to profit on investments in such securities as stocks or bonds, many companies use this term to refer to short-term and long-term business results. Profit is also sometimes called taxable income.

It's the job of the accounting and finance professionals to assess the profits and losses of a company. They have to know what created both and what the results of both sides of the business equation are. They determine what the net worth of a company is. Net worth is the resulting dollar amount from deducting a company's liabilities from its assets. In a privately held company, this is also called owner's equity, since anything that's left over after all the bills are paid, to put it simply, belongs to the owners. In a publicly held company, this profit is returned to the shareholders in the form of dividends. In other words, all liabilities have the first claim on any money the company makes. Anything that's left over is profit. It's not derived from one element or another. Net worth is determined after all the liabilities are deducted from all the assets, including cash and property.

Showing a profit, or a positive figure on the balance sheet, is of course the aim of every business. It's what our economy and society are built on. It doesn't always work out that way. Economic trends and consumer behaviors change and it's not always possible to predict these and what income they'll have on a company's performance.

Careers of accounting

Careers
There are many different careers in the field of accounting ranging from entry-level bookkeeping to the Chief Financial Officer of a company. To achieve positions with more responsibility and higher salaries, it's necessary to have a degree in accounting as well as achieve various professional designations.

One of the primary milestones in any accountant's career is to become a Certified Public Accountant or CPA. To become a CPA you have to go to college with a major in accounting. You also have to pass a national CPA exam. There's also some employment experience required in a CPA firm. This is generally one to two years, although this varies from state to state. Once you satisfy all those requirements, you get a certificate that designates you as a CPA and you're allowed to offer your services to the public.

Many CPAs consider this just one stepping stone to their careers. The chief accountant in many offices is called the controller. The controller is in charge of managing the entire accounting system in a business stays on top of accounting and tax laws to keep the company legal and is responsible for preparing the financial statements.

The controller is also in charge of financial planning and budgeting.  Some companies have only one accounting professional who's essentially the chief cook and bottle washer and does everything. As a business grows in size and complexity, then additional layers of personnel are required to handle the volume of work that comes from growth. Other areas in the company are also impacted by growth, and it's part of the controller's job to determine just how many more salaries the company can pay for additional people without negatively impacting growth and profits.

The controller also is responsible for preparing tax returns for the business; a much more involved and complex task than completing personal income tax forms! In larger organizations, the controller can report to a vice president of finance who reports to the chief financial officer, who is responsible for the broad objectives for growth and profit and implementing the appropriate strategies to achieve the objectives.

Bookkeeping

Bookkeeping
So what goes on the accounting and bookkeeping departments? What do these people do on a daily basis?

Well, one thing they do that's terribly important to everyone working there is Payroll. All the salaries and taxes earned and paid by every employee every pay period have to be recorded. The payroll department has to ensure that the appropriate federal, state and local taxes are being deducted. The pay stub attached to your paycheck records these taxes. They usually include income tax, social security taxes pous employment taxes that have to be paid to federal and state government. Other deductions include personal ones, such as for retirement, vacation, sick pay or medical benefits.  It's a critical function. Some companies have their own payroll departments; others outsource it to specialists.

The accounting department receives and records any payments or cash received from customers or clients of the business or service. The accounting department has to make sure that the money is sourced accurately and deposited in the appropriate accounts. They also manage where the money goes; how much of it is kept on-hand for areas such as payroll, or how much of it goes out to pay what the company owes its banks, vendors and other obligations. Some should also be invested.

The other side of the receivables business is the payables area, or cash disbursements. A company writes a lot of checks during the course of year to pay for purchases, supplies, salaries, taxes, loans and services. The accounting department prepares all these checks and records to whom they were disbursed, how much and for what. Accounting departments also keep track of purchase orders placed for inventory, such as products that will be sold to customers or clients. They also keep track of assets such as a business's property and equipment. This can include the office building, furniture, computers, even the smallest items such as pencils and pens.

Accounting Principles

Accounting Principles
If everyone involved in the process of accounting followed their own system, or no system at all, there's be no way to truly tell whether a company was profitable or not. Most companies follow what are called generally accepted accounting principles, or GAAP, and there are huge tomes in libraries and bookstores devoted to just this one topic. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP.

If GAAP are not the principles used for preparing financial statements, then a business needs to make clear which other form of accounting they're used and are bound to avoid using titles in its financial statements that could mislead the person examining it. 

GAAP are the gold standard for preparing financial statement. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses. Different principles have been established for different types of business entities, such for-profit and not-for-profit companies, governments and other enterprises.

GAAP are not cut and dried, however. They're guidelines and as such are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy. You've surely heard the phrase "creative accounting" and this is when a company pushes the envelope a little (or a lot) to make their business look more profitable than it might actually be. This is also called massaging the numbers. This can get out of control and quickly turn into accounting fraud, which is also called cooking the books. The results of these practices can be devastating and ruin hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.