Today’s Topic:   The Top 15 Things People Do Wrong in  Their Bookkeeping Welcome to TaxMama’s Place  Home of the  06/10/09...
Table of Contents <ul><li>What is your entity? </li></ul><ul><li>Understand the Accounting Equation </li></ul><ul><li>Don’...
1. What is your entity? <ul><li>Sole Proprietorship – just you and your wife </li></ul><ul><li>Partnership – you and a par...
1.1 What Form will you File? <ul><li>Schedule C - For Sole Proprietors </li></ul><ul><li>Schedule E - Rental Properties an...
2. Understand the  Accounting Equation <ul><li>Assets = Liabilities + Capital   </li></ul><ul><li>Assets  - all the things...
<ul><li>Paypal </li></ul><ul><li>Google Checkout </li></ul><ul><li>Amazon Marketplace account </li></ul><ul><li>Etc. </li>...
4. Credit Card payments are not a lump sum amount <ul><li>How do you record your credit payments on QuickBooks?  </li></ul...
4.1 Splitting Checks  06/10/09 © www.TaxMama.com 2009
4.2 Paying Mixed Bills <ul><li>Credit card bills that include personal charges </li></ul><ul><li>Checks written to one ven...
5. Your contributions and loans to your business are not Income <ul><li>Look at your own Profit and Loss Statement – in Qu...
5.1 Booking Your Own Money  <ul><li>For Loans: </li></ul><ul><li>In your deposit receipt, enter the deposit amount. The ac...
6. Draws are not expenses <ul><li>Look at your own Profit and Loss Statement – in Quicken or  QuickBooks.  </li></ul><ul><...
6.1 Booking your own Draws <ul><li>For Loans from your business: </li></ul><ul><li>In your check record, enter the loan am...
7. Should you be on payroll? <ul><li>Speaking of draws…. </li></ul><ul><li>When your business is a Corporation or S Corpor...
8.  Your inventory purchases are not expenses <ul><li>Look at your own Profit and Loss Statement – in Quicken or  QuickBoo...
8.1 Entering Inventory <ul><li>In your check record, enter the purchase amount. The account to record the money is an Asse...
9.  Recording asset purchases   <ul><li>Look at your own Profit and Loss Statement – in Quicken or  QuickBooks.  </li></ul...
9.1 Booking Assets <ul><li>In your check record, enter the purchase amount. The account to record the money is a Fixed Ass...
10. Booking Loans <ul><li>Often, people just book the payments, for instance, Dell $136.50 per month. That’s silly. This i...
10.1 Booking Loan Payments <ul><li>By definition, loans charge interest. </li></ul><ul><li>When booking a loan payment, sp...
11.  Why Auto expense detail  is important <ul><li>Remember Point 9 – about booking assets. </li></ul><ul><li>Auto expense...
12.  Not all insurance is deductible <ul><li>Non-Deductible Insurance </li></ul><ul><li>All life insurance on owners </li>...
13. N o Miscellaneous or Other   <ul><li>MAJOR RED FLAG! </li></ul><ul><li>It’s common sense.  </li></ul><ul><li>You see a...
14.  Do not lump all your  business expenses together <ul><li>You probably don’t do this, but… </li></ul><ul><li>More comm...
15.  Split hotel bills between meals, entertainment and lodging <ul><li>Lodging, travel and transportation are fully deduc...
Getting it Right! <ul><li>You’ll be better able to compute your correct Estimated Tax Payments </li></ul><ul><li>And </li>...
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The Top 15 Things People Do Wrong

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Learn the top 15 things Small Business Owners and Entrepreneurs do wrong

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  • Orientation - Exam Taking Techniques 06/10/09 © 2007 Eva Rosenberg, EA and TaxMama’s EA Exam Review Class
  • The Top 15 Things People Do Wrong

    1. 1. Today’s Topic: The Top 15 Things People Do Wrong in Their Bookkeeping Welcome to TaxMama’s Place Home of the 06/10/09 © www.TaxMama.com 2009
    2. 2. Table of Contents <ul><li>What is your entity? </li></ul><ul><li>Understand the Accounting Equation </li></ul><ul><li>Don’t overlook your online bank accounts – like PayPal </li></ul><ul><li>Credit Card payments are not a lump sum amount </li></ul><ul><li>Your contributions and loans to your business are not Income </li></ul><ul><li>Your draws from the business are not expenses </li></ul><ul><li>Should you be on payroll? </li></ul>06/10/09 © www.TaxMama.com 2009 <ul><li>Your inventory purchases are not expenses </li></ul><ul><li>Recording asset purchases </li></ul><ul><li>Recording loan payments </li></ul><ul><li>Why Auto expense detail is important </li></ul><ul><li>Not all insurance is deductible </li></ul><ul><li>There is no such account as Miscellaneous or Other </li></ul><ul><li>Do not lump all your business expenses together </li></ul><ul><li>Split your hotel bills between meals, entertainment and lodging </li></ul>
    3. 3. 1. What is your entity? <ul><li>Sole Proprietorship – just you and your wife </li></ul><ul><li>Partnership – you and a partner – or your wife </li></ul><ul><li>LLC – which means…you still need to decide </li></ul><ul><li>C Corporation </li></ul><ul><li>S Corporation </li></ul><ul><li>Trust </li></ul><ul><li>Exempt organization – non-profit </li></ul>06/10/09 © www.TaxMama.com 2009
    4. 4. 1.1 What Form will you File? <ul><li>Schedule C - For Sole Proprietors </li></ul><ul><li>Schedule E - Rental Properties and Royalties </li></ul><ul><li>Schedule F - Farms and Ranches </li></ul><ul><li>Form 1065 - Partnerships and joint ventures </li></ul><ul><li>Form 1120 – C Corporations </li></ul><ul><li>Form 1120S – S Corporations </li></ul><ul><li>Form 1041 – Estates and Trusts </li></ul><ul><li>Form 990 - Exempt Orgs </li></ul><ul><li>Other … </li></ul>06/10/09 © www.TaxMama.com 2009
    5. 5. 2. Understand the Accounting Equation <ul><li>Assets = Liabilities + Capital </li></ul><ul><li>Assets - all the things you own </li></ul><ul><li>Liabilities - all the things you owe </li></ul><ul><li>Capital - your equity in the business </li></ul>06/10/09 © www.TaxMama.com 2009
    6. 6. <ul><li>Paypal </li></ul><ul><li>Google Checkout </li></ul><ul><li>Amazon Marketplace account </li></ul><ul><li>Etc. </li></ul>06/10/09 © www.TaxMama.com 2009 3. online bank accounts and wallets
    7. 7. 4. Credit Card payments are not a lump sum amount <ul><li>How do you record your credit payments on QuickBooks? </li></ul><ul><ul><li>Enter the check amount in the check register and charge it to … </li></ul></ul><ul><ul><li>Office Expense, or Travel, or Supplies, or…? </li></ul></ul><ul><li>QuickBooks allows you to SPLIT check entries. </li></ul><ul><li>Do it with every credit card payment. </li></ul>06/10/09 © www.TaxMama.com 2009
    8. 8. 4.1 Splitting Checks 06/10/09 © www.TaxMama.com 2009
    9. 9. 4.2 Paying Mixed Bills <ul><li>Credit card bills that include personal charges </li></ul><ul><li>Checks written to one vendor for office supplies and inventory or capital assets </li></ul><ul><li>Buying something that is used for both personal and business </li></ul>06/10/09 © www.TaxMama.com 2009
    10. 10. 5. Your contributions and loans to your business are not Income <ul><li>Look at your own Profit and Loss Statement – in Quicken or QuickBooks. </li></ul><ul><li>Under Income, see – </li></ul><ul><ul><li>Deposits from Owner (or similar term)? </li></ul></ul><ul><ul><li>Loan from Owner </li></ul></ul><ul><li>Notice how that increases your overall income – and your ‘taxable’ profits? </li></ul><ul><li>How should you enter them on your books? </li></ul>06/10/09 © www.TaxMama.com 2009
    11. 11. 5.1 Booking Your Own Money <ul><li>For Loans: </li></ul><ul><li>In your deposit receipt, enter the deposit amount. The account to record the loan is – LOAN FROM OWNER ( or officer, partner or…) </li></ul><ul><li>And write up a loan document with interest rates etc. Have the business pay the interest! </li></ul><ul><li>For Contributions to the company: </li></ul><ul><li>In your deposit receipt, enter the deposit amount. The account to record the money is – Capital Contribution ( or stock purchase or…) </li></ul>06/10/09 © www.TaxMama.com 2009
    12. 12. 6. Draws are not expenses <ul><li>Look at your own Profit and Loss Statement – in Quicken or QuickBooks. </li></ul><ul><li>Under Expenses, see – </li></ul><ul><ul><li>Owner Draws (or similar term)? </li></ul></ul><ul><ul><li>Loan to Owner </li></ul></ul><ul><li>Do you notice how that falsely reduces your overall income – and your ‘taxable’ profits – and often turns it into a loss? </li></ul><ul><li>How should you enter them on your books? </li></ul>06/10/09 © www.TaxMama.com 2009
    13. 13. 6.1 Booking your own Draws <ul><li>For Loans from your business: </li></ul><ul><li>In your check record, enter the loan amount. The account to record the loan is – LOAN TO OWNER ( or officer, partner or…) </li></ul><ul><li>And write up a loan document with interest rates etc. Pay the interest to your business! </li></ul><ul><li>For Draws from the company: </li></ul><ul><li>In your check record, enter the draw amount. The account to record the money is – Capital – Draws (name) </li></ul><ul><li>Note: You may not take draws from a corporation or S corporation. </li></ul><ul><li>In a partnership, your draws may need to disclosed to the other partners or equalized with their draws…or… </li></ul>06/10/09 © www.TaxMama.com 2009
    14. 14. 7. Should you be on payroll? <ul><li>Speaking of draws…. </li></ul><ul><li>When your business is a Corporation or S Corporation, if there is enough money for you to be getting ‘draws’, you should be on payroll. </li></ul><ul><li>Officers must take reasonable wages or compensation – with all the payroll tax trimmings. </li></ul><ul><li>Note: Sole proprietorships and partnerships may not pay owners or partners on payroll. </li></ul>06/10/09 © www.TaxMama.com 2009
    15. 15. 8. Your inventory purchases are not expenses <ul><li>Look at your own Profit and Loss Statement – in Quicken or QuickBooks. </li></ul><ul><li>Under Expenses, see – </li></ul><ul><ul><li>Purchases (or some similar term) </li></ul></ul><ul><li>Notice how that hugely decreases your overall income – and your ‘taxable’ profits? </li></ul><ul><li>How should you enter them on your books? </li></ul>06/10/09 © www.TaxMama.com 2009
    16. 16. 8.1 Entering Inventory <ul><li>In your check record, enter the purchase amount. The account to record the money is an Asset Account – Inventory </li></ul><ul><li>At the end of each year, you need to take a count of your inventory and make a journal entry to reconcile your inventory to amount to the year-end balance. </li></ul><ul><ul><ul><li>Debit Purchases (Expense account) </li></ul></ul></ul><ul><ul><ul><li>Credit Inventory (Asset account) </li></ul></ul></ul><ul><li>If you’re using QuickBooks’ Point of Sale system, you can enter the purchases into the specific inventory category. (Books – Nancy Drew – Hardcover, etc.) </li></ul><ul><ul><li>Handled properly, you should not need to make a journal entry at the end of the year. Or a minor one for adjustments. </li></ul></ul>06/10/09 © www.TaxMama.com 2009
    17. 17. 9. Recording asset purchases <ul><li>Look at your own Profit and Loss Statement – in Quicken or QuickBooks. </li></ul><ul><li>Under Expenses, see – </li></ul><ul><ul><li>Office Expenses </li></ul></ul><ul><ul><li>Auto Expenses </li></ul></ul><ul><ul><li>Supplies </li></ul></ul><ul><li>Are the total expenses for any of these categories unreasonably high? You probably expensed an equipment purchase, or a down payment on a car or… </li></ul><ul><li>How should you enter them on your books? </li></ul>06/10/09 © www.TaxMama.com 2009
    18. 18. 9.1 Booking Assets <ul><li>In your check record, enter the purchase amount. The account to record the money is a Fixed Asset Account – Equipment, or Office Equipment, or Vehicle, or… </li></ul><ul><li>Yes, you may be able to write the whole expense off in the year of purchase using IRC Section 179 depreciation. </li></ul><ul><li>At the end of each year (or each month), record depreciation </li></ul><ul><ul><ul><li>Debit Depreciation Expense (Expense account) </li></ul></ul></ul><ul><ul><ul><li>Credit Accumulated Depreciation (Fixed Asset account) </li></ul></ul></ul>06/10/09 © www.TaxMama.com 2009
    19. 19. 10. Booking Loans <ul><li>Often, people just book the payments, for instance, Dell $136.50 per month. That’s silly. This isn’t a lease! </li></ul><ul><li>You must enter the full price of the Asset purchased in your check register, using the SPLIT function. Split the entry as follows: </li></ul><ul><li>Debit Credit </li></ul><ul><li>Fixed Asset – Computer $1,000 </li></ul><ul><li>Loan – Dell Computer -$1,000 </li></ul>06/10/09 © www.TaxMama.com 2009
    20. 20. 10.1 Booking Loan Payments <ul><li>By definition, loans charge interest. </li></ul><ul><li>When booking a loan payment, split the check and record the interest and principal, as follows: </li></ul><ul><li>Enter payment amount in the check register $275.00 </li></ul><ul><li>Debit Credit </li></ul><ul><li>Loan – Dell Computer $200. </li></ul><ul><li>Interest expense:Loans $ 25. </li></ul><ul><li>Either the statement provides the breakdown, or print out a loan amortization schedule for yourself at the beginning. </li></ul><ul><li>http://www.amortization-calc.com/ </li></ul>06/10/09 © www.TaxMama.com 2009
    21. 21. 11. Why Auto expense detail is important <ul><li>Remember Point 9 – about booking assets. </li></ul><ul><li>Auto expense detail often contains: </li></ul><ul><li>Down payments </li></ul><ul><li>Personal expenses – fuel, insurance, fuzzy dice </li></ul><ul><li>The occasional surprise </li></ul><ul><li>Keep BOTH detail and mileage data. </li></ul><ul><li>At the end of the year, you might be able use whichever is higher. (or not…) </li></ul><ul><li>Certainly, for the year of purchase, you’ll want actual expenses, since the depreciation can be generous </li></ul>06/10/09 © www.TaxMama.com 2009
    22. 22. 12. Not all insurance is deductible <ul><li>Non-Deductible Insurance </li></ul><ul><li>All life insurance on owners </li></ul><ul><li>Premiums on all life insurance in excess of $50,000 on employees or corporate officer/employees </li></ul><ul><li>Health Insurance (on Schedule C) </li></ul><ul><li>Certain health insurance on other entity returns (must have written plan) </li></ul><ul><ul><li>Note: insurance on family members who do not work for the business, or are not covered by spouse on Sec 125 plan </li></ul></ul><ul><li>Personal portion of homeowners insurance, auto insurance </li></ul><ul><li>NEVER deduct disability insurance premiums. That way benefits are not taxable, when it’s time to collect. </li></ul>06/10/09 © www.TaxMama.com 2009
    23. 23. 13. N o Miscellaneous or Other <ul><li>MAJOR RED FLAG! </li></ul><ul><li>It’s common sense. </li></ul><ul><li>You see a large number on a return for an account called Miscellaneous or Other. </li></ul><ul><li>Wouldn’t YOU want to know what’s in there? So does IRS. </li></ul><ul><li>Take everything out of those accounts and put them somewhere! </li></ul>06/10/09 © www.TaxMama.com 2009
    24. 24. 14. Do not lump all your business expenses together <ul><li>You probably don’t do this, but… </li></ul><ul><li>More common sense – The smaller you can make the total in most expense categories, the less likely it is to attract audit. </li></ul><ul><li>Break up expenses into more detail. For instance: </li></ul><ul><ul><li>Supplies could be: </li></ul></ul><ul><ul><li>Office Supplies </li></ul></ul><ul><ul><li>Marketing Supplies </li></ul></ul><ul><ul><li>Technology supplies (toner, cables, etc.) </li></ul></ul><ul><li>Certain expenses should be large – like advertising. </li></ul>06/10/09 © www.TaxMama.com 2009
    25. 25. 15. Split hotel bills between meals, entertainment and lodging <ul><li>Lodging, travel and transportation are fully deductible. </li></ul><ul><li>Meals and entertainment are reduced by 50% </li></ul><ul><li>When IRS sees big travel expenses and small meals numbers – they know the travel includes meals expenses. </li></ul><ul><li>Note: Remember, hotel room bills often have room service, or client entertainment costs (meetings – banquet service). Save the hotel printout and use the SPLIT feature in QuickBooks to enter the detail when entering credit card charges (or checks or cash payments). </li></ul><ul><li>Note 2: Tips – include them with the appropriate expense – bellhops and valet with Hotel; waiters and room service with meals, etc. </li></ul>06/10/09 © www.TaxMama.com 2009
    26. 26. Getting it Right! <ul><li>You’ll be better able to compute your correct Estimated Tax Payments </li></ul><ul><li>And </li></ul><ul><li>You’ll save a fortune! </li></ul>06/10/09 © www.TaxMama.com 2009
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