Is Your Chart of Accounts Too Long?Posted on April 17th, 2018
Ever find yourself taking minutes to classify simple transactions? Do you periodically spot accounts in your chart of accounts that you did not know existed? These might be signs that your chart of accounts is too long!
A Profit and Loss report (P&L) is meant to provide management with a bird’s eye view of your organization’s financials. If more detail is desired, additional reporting would be better than an overly detailed P&L. In QuickBooks, using classes is a great way to create additional dimensions in reporting, and you can create customized reports to analyze your finances using a myriad of parameters.
It all starts with a solid chart of accounts. An effective chart of accounts will take into consideration tax reporting guidelines to ensure necessary items are tracked on the P&L. Tax forms generally require very high-level P&L detail, and your P&L should mirror this reporting.
Bookkeepers and management are often misled to believe that an exhaustive chart of accounts is better because it provides more detail for reporting, but this can backfire and cause issues such as the following.
No one wants inaccurate reporting, but it’s easy to achieve with a lengthy chart of accounts. Having too many accounts makes it difficult to classify transactions. For example, you may have accounts for Communications and Utilities. Which account would you use for telephone expenses? What about email? If you have multiple people working on your books, there’s a good chance that expenses will be inconsistently classified and your budgets and prior period comparisons will be inaccurate.
Immaterial Balances in Accounts
This happens when accounts are too specific and each account contains few or even a single type of expense. Let’s expand on the example above: say you split Utilities into Phone, Internet, Garbage, Gas and Electricity, and Water. It may not seem like a big deal, but splitting your chart of accounts like this can prevent your organization’s ability to meaningfully analyze the P&L.
A high level of detail typically hinders meaningful analysis since it is more difficult to focus on the bigger picture and associated trends. The amount your organization spends on water is probably not significant in the grand scheme of things, but the total you spend on utilities or location-related items might be. With so many accounts, you risk wasting time analyzing variances that do not truly impact the company’s financials.
What We Recommend
Most organizations can limit their P&L to 30 income and expense accounts. Here are some steps you can take to condense your chart of accounts:
- Review your chart of accounts to identify which accounts are too specific or too similar to other accounts.
- Shorten or change account names to make them more generic. For example, if you currently have accounts named Website Development and Website Hosting, you could consolidate them into one Website account. Or if you have individual accounts called Hotel Accommodations, Airfare, Taxis, etc., consolidate them into one Travel account. Related accounts, as in this example, are often dependent on one another, so it makes sense to budget for and analyze the total.
At Moss CPA, we strive to ensure each client’s chart of accounts meets all reporting requirements for management, as well as tax authorities. If you have any questions about whether your chart of accounts can benefit from some optimization, please feel free to reach out to us!
In-Kind Contributions: Donor ResponsibilitiesPosted on April 2nd, 2018
Has your nonprofit received an in-kind donation of goods? This is great for your organization, but let’s make sure you are providing your donor with the support they need to properly report it on their personal tax returns.
The standards for documentation vary depending on the amount and/or size of the donation. If your donor wants to claim the donation of this item as a deduction on his or her personal returns, then he or she needs to have a written receipt from your organization to substantiate the deduction.
When you are preparing and sending the acknowledgement letter, remember that the responsibility of determining the value of the donated property lies with the donor. Your responsibility is to write the donor an acknowledgement letter that describes the donated equipment but does NOT assign a value to the equipment.
For donations valued at $5,000 or more, the donated item needs to be appraised to determine its fair market value. (Again, this is the donor’s responsibility and NOT that of the nonprofit organization receiving the donation. However, if the donor informs you that the donated item is worth $5,000 or more, it is your organization’s responsibility to request documentation verifying the item’s value.)
The valuation should be done by an independent appraiser who should provide a written report. The donor should then send you a copy of this report and a completed IRS Form 8283 for your organization to sign and keep a copy of. Your donor can attach this form to his or her 1040 when filing it the following year.
If you have any questions about this process, please feel free to contact us—we’d be happy to talk you through it.
Comingling Expenses and Why You Should Avoid ItPosted on March 6th, 2018
For small business owners, it can be all too easy to intertwine business and personal finances. This is referred to as “comingling” and should be avoided for a few key reasons:
- Audits – Personal expenses are not tax deductible for your business. The IRS states that for business expenses to be deductible, they should be ordinary and necessary for your trade or business. Making personal purchases with company funds and deducting the expenses could get you in trouble during an audit.
- Loss of liability protection – Depending on the type of business entity you have, comingling expenses might cause you to lose the liability protection that a corporation provides, meaning that you as an individual could be held responsible if the company owes money.
- Misleading analytics – Comingling is a slippery slope—a few purchases every other week can add up to a surprisingly significant amount by the end of the year. As the level of comingling increases, it becomes more difficult to understand how your business is performing. Your business expenses become overstated, which skews trends and makes analysis less meaningful and accurate.
To avoid comingling expenses, a business should have its own bank and credit card accounts, and owners should avoid using the business accounts for personal use. This is a good idea for sole proprietors as well, since it simplifies the accounting process, allows for better reporting, and makes tax preparation a breeze!
While reading this article so far, you probably thought to yourself: “This sounds great! No more comingling for my business going forward!” But what about the following situations?
- When you forget your business checkbook or credit card and have to use your personal card
- When you accidentally use your business card for a personal expense
- When both you and your business use an item or service (such as your cell phone)
There are very simple solutions for these situations! Here are the best practices to account for them:
When you personally pay for a business expense:
Submit an expense reimbursement form with supporting documentation to the business for reimbursement. The company can either process a payment or leave the liability on the Balance Sheet in a “Reimbursements Payable” account. This is a good way to record these types of transactions when your business is short on cash and you don’t mind being reimbursed later.
When you charge a personal item on a company card:
Record the transaction as a receivable/asset for the company. You can create an “Employee Advance” account that shows a balance to be reimbursed by an employee. Recording the transaction in this manner will keep the personal expense from appearing on the Income Statement. Its presence on the Balance Sheet will remind you that the company needs to be reimbursed. The advanced amount can be paid back or applied against the Reimbursements Payable balance, if available.
When you share the cost of an item or service with your business:
You need to determine the proportion of business to personal use for the item or service. Accounting for this may depend on the type of business you have and to whom the item/service belongs (you or the company). Here are two different examples and how to account for them:
- Any type of company – If you’re using your personal cell phone to make business calls, it is reasonable to be compensated for that use by your business. If 50% of your cell phone use is for your business, then the business should reimburse you for 50% of your bill. Submit an expense reimbursement form with your bill as supporting documentation.
- Sole proprietors and partnerships – If you’re using your company cell phone for personal calls, split the expense between an expense account (such as “Telephone” or “Utilities”) and an equity account (usually “Owner’s Draw”). By doing this, you’re honestly reporting your personal use of something your business pays for (and deducts).
- Corporations – Stop right here! Items or services paid for by your business are off-limits for personal use.
If you use Balance Sheet accounts to record these transactions, don’t forget to reconcile those accounts! Refer to our blog on Reconciliation Best Practices to learn more about why this is so important.
Thanks for reading, and we hope you found this blog helpful. If you have any questions, feel free to leave a comment below!
Using QuickBooks Bank Feeds & Avoiding 3 Common MistakesPosted on February 20th, 2018
If you haven’t experienced the ease of recording transactions using QuickBooks’ Bank Feed function, jump on the bandwagon! Bank Feeds automatically import transactions directly from your financial institution to QuickBooks Desktop or QuickBooks Online. According to Intuit, there are over 1,400 financial institutions across the US and Canada whose online banking services integrate with QuickBooks, so there’s no excuse not to sync QuickBooks with your bank account. Welcome to the thrilling world of Bank Feeds!
Using Bank Feeds
Once you’ve connected your online banking to QuickBooks, you are ready to import transactions! All it takes is one click of a button (plus your bank password)!
As it imports your bank data, QuickBooks automatically classifies certain transactions using Rules. Rules use the information contained in each bank transaction (usually the merchant name) to fill in the vendor name and account in QuickBooks.
The first time you use Bank Feeds, you won’t have any Rules established, so you will have to enter all this information yourself. When you’re done, QuickBooks will ask you if you want to add Rules for the transactions you’ve approved; once the Rules are created, they’ll be used to recognize and classify similar transactions going forward. This tool has drastically improved efficiency for accountants and small business owners, leaving them more time to take care of other important business functions.
Although the Bank Feed function can save you hours when used correctly, it can cost you more time in the long run if you make the following common mistakes:
1. Recording All Transactions through the Bank Feed
The first big mistake that people make when using Bank Feeds is not recording certain transactions outside of the feed. (Take a look at our blog Best Practices: Recording Transactions in QuickBooks for more detail on the transactions that should be recorded manually.) Once you download your transactions into the Bank Feed, the transactions you’ve manually entered will be marked “Match,” meaning the Bank Feed matched the transaction you imported with the transaction already in QuickBooks! This adds an extra layer of assurance that your transactions have been entered correctly.
2. Neglecting to Review Bank Feed Rules
Relying too heavily on the Bank Feed Rules can lead to misclassification of your transactions. Rules is a great feature that eliminates data entry for many reoccurring transactions, but that doesn’t mean you should blindly trust it. Each time you use the Bank Feed, scan the list of transactions that have been classified using Rules to ensure the vendor and account information has populated correctly.
3. Adding Duplicate Rules
QuickBooks Desktop asks you if you want to create a new Rule for each transaction you accept that doesn’t match any existing Rule definitions. It is very easy to click “Okay” without actually reviewing the Rules you just created. If you navigate to the Rules list (in the top left corner of the Bank Feed window) you will often find multiple Rules for the same vendor! For example, a transaction from Chipotle will be imported from your bank with the store number in the merchant name. It will create a new Rule for EACH new Chipotle store you eat at.
Duplicate Rules may not seem like a huge deal, but result is that you’re manually recording far more transactions than you need to. You can avoid this by editing the Rule and removing the additional information (the store number, in this case) that would prevent it from matching a transaction made at a different Chipotle store.
You should always review Rules before you accept them. It’s also a good habit to periodically review your Rules list for duplicates you missed previously.
QuickBooks’ Bank Feed feature is one of the many ways that a solid accounting system can make your life easier. If you’re not using Bank Feeds yet, what are you waiting for?
In-Kind ContributionsPosted on February 6th, 2018
In-kind contributions are services or goods that are donated to your organization. They have a real monetary value, but you must handle them differently when recording them in your accounting system and acknowledging your donors.
When you receive an in-kind donation of services, record it in your accounting system as a net zero transaction; the in-kind contribution is recorded as revenue with a corresponding expense for the service provided.
For example, let’s say that an attorney on your board spent ten hours providing you with legal advice. This is a real expense that your organization would have paid for if you didn’t have that board member. It is important to record these contributions of goods or services at fair market value. However, when you send the donor an acknowledgement letter, you should describe the services they performed for you without assigning a dollar value to those services—the real market value of their services is for your organization’s records only. The IRS does not allow individuals to deduct the value of their time as a charitable contribution, but it does allow them to deduct the actual expenses incurred while donating their time (e.g., mileage, office supplies, etc.).
Donated goods can be treated a little differently depending on the nature of the goods.
If you receive some consumables that you would normally purchase and use in your ordinary business operations, enter a net zero transaction that records the revenue and corresponding expense. If the donation is a capital asset, then record the revenue and, instead of recording a corresponding expense, record the asset and start depreciating it. You should record the donated items at fair market value. Again, when preparing the acknowledgement letter for the donor, describe the item(s) donated to you without assigning a dollar value to the items. It is the responsibility of your donor to determine and report the value of their donation on their personal returns. We’ll cover their responsibilities in another post.
Best Practices: Reconciling Accounts in QuickBooksPosted on January 24th, 2018
We’ve all heard about the importance of reconciling bank accounts, but what does that really mean? And since we can log in to our bank accounts and view our balances any time we want, why is it necessary to reconcile them?
When we reconcile a bank account, we compare the bank balance in QuickBooks to the balance on the bank statement. Matching the transactions ensures that we’re properly recording all the bank transactions and the bank is clearing those transactions accurately.
The key to performing a quality bank reconciliation is addressing the outstanding transactions. These are transactions that we recorded but of which the bank has no record or vice versa. Now things are getting interesting!
Here’s a guide with a few examples of outstanding transactions and how to fix them:
As you can see, reconciling our accounts allows us to identify and fix errors in QuickBooks. This is an important step in maintaining good books and one that is often overlooked. Okay, now that we’ve reconciled our bank accounts, we’re done with our month-end close, right?
Not so fast! In addition to reconciling our bank accounts, we also want to reconcile several of our other balance sheet accounts. We can reconcile our
- other current assets (prepaid expenses, employee advances, etc.),
- long-term assets (e.g., security deposits), and
- liabilities (payroll taxes, retirement plan payables, deferred revenue, etc.).
When the accounts don’t reconcile to zero, we review the outstanding transactions for reasonableness. If you haven’t reconciled your balance sheet accounts recently, then you will probably identify some errors in QuickBooks, such as duplicate transactions or missing journal entries.
The best practice is to reconcile bank and balance sheet accounts as part of our month-end close process. Once you start reconciling your accounts regularly, you’re well on your way to a strong accounting system!
Identifying and Preventing FraudPosted on January 8th, 2018
Fraud is a terrifying thought to a business owner. You, like most people, probably think “It can’t happen to me.” However, according to the Association of Certified Fraud Examiners, privately-owned businesses and nonprofit organizations comprise nearly half the cases of occupational fraud.1 It’s more common than you thought! Proactively identifying and preventing fraud can seem like a daunting task, but it can be relatively easy. We’ve come up with three simple steps you can take to ensure your business is protected.
- Applicant Screenings
- Company Policies and Controls
- Team Fraud Education
1. Applicant Screenings
Preventing fraud starts with—you guessed it—hiring employees! Running background checks before hiring people seems like an obvious step, but a miniscule fraction of California-based small businesses actually take the time to do it.2 Although paying for a background check can be expensive and unnecessary for all positions, we recommend it for higher-level positions, especially those that provide employee access to credit cards, financial information, personnel files, or other confidential information. To learn more about background checks, including whether your company is authorized to request them from applicants, check out the California Department of Justice’s website.
Although background checks easily illuminate an applicant’s criminal history, predicting the future behavior of an applicant isn’t so simple. Did you know that roughly 88% of occupational fraudsters are first-time offenders with clean employment histories?3 With that in mind, take the time to get to know a candidate’s character. Trust us—it can make a huge difference. Although you may be facing pressure to quickly fill an open position, we recommend slowing down the hiring process to allow time for multiple interviews and in-depth reference checks. After all, you should be sure your applicant is the right fit for the position!
2. Company Policies and Controls
One of the most important steps to establishing companywide fraud prevention is implementing and enforcing policies and controls. Clearly explaining the consequences for unethical behavior in a company policy is a great way to deter employees from acting in the first place. Some companies even set up whistleblower hotlines that allow employees to speak up when they see wrongdoing. Although they can be helpful in identifying fraud, whistleblower policies should be used with caution due to the possibility of false reports.
Controls are another integral tool in preventing fraud, and they can double as a review process to ensure accuracy. A few financial controls we recommend having in place are duty segregation, balance sheet account reconciliations, employee cross-training, and employee expense approvals. We will dive deeper into this subject in our upcoming post on Financial Controls.
3. Team Fraud Education
Educating your employees on how to identify and prevent fraud is key to establishing a fraud-free work environment. Try conducting monthly or quarterly meetings with fraud quizzes or other knowledge-based games; they’re an interactive way to educate your team, and they can double as a team-building exercise. If you’re at a loss for ideas, take a look at the fun and informative quizzes published by the Journal of Accountancy!
Once your team is taught to be on the lookout for key fraud indicators, you’ll have more eyes to watch for potential wrongdoing. This awareness works twofold, as it can also prevent employees from acting on temptations to commit fraud.
If you suspect an employee of fraudulent activity, DON’T take action right away! If you fire the employee quickly, it is less likely you will be able to gather sufficient evidence to document his or her crimes. Instead, restrict the employee’s access to company data while investigation is underway. You can outsource a forensic accounting team to assist with the investigation process.
If you’re already employing these methods in your company, here’s a virtual high five! If you’re not, we’re happy to give you pointers on implementing these processes. Feel free to leave a comment if you have a question. We’d also love to hear if you have more tips on fraud prevention and identification!
- Association of Certified Fraud Examiners, 2016 Report to the Nations.
3 Types of Charitable Contributions and How to Identify ThemPosted on December 20th, 2017
Restricted donation or general support? Here are the three categories to consider when classifying your donations:
Unrestricted donations are contributions that do not have any donor-imposed requirements. These are commonly known as general contributions or operating support. You can spend these funds however you like.
Temporarily restricted contributions are donations with a directive from your donor that instructs you how to use the donation. Restrictions are usually time- or use-based. When you accept a restricted donation, you agree to spend the funds in line with your donor’s wishes.
- An example of a time-based restriction is when you receive a donation at the end of one fiscal year that is specifically for use in the next year.
- An example of a use-based restriction is when a donor gives you money to support a specific program activity, in which case you cannot use it to fund administrative or fundraising expenses.
Permanently restricted contributions are gifts that usually go to fund an endowment. These are funds that your organization will hold in perpetuity, using the principal to generate revenues to support your organization’s operations.
Why does donation classification matter so much?
Donations and grants are major sources of revenue for many nonprofits, so it is vitally important to properly identify and record contributions when they are received by your organization. Your finance committee or board of directors need to know the proper breakdown of income by revenue stream so they can make informed decisions about your nonprofit. Properly classifying contributions when they come in can also save your organization from unintentionally misappropriating funds (and being sued by angry donors).
To learn more about how to account for contributions, check out our other posts in the Nonprofit Contributions series.
Best Practices: Recording Transactions in QuickBooksPosted on December 8th, 2017
With electronic banking and bank feeds it’s never been easier to record transactions in QuickBooks. We can open QuickBooks and recent transactions are waiting for us to approve! What could be simpler? We can head to the beach and let the computers do our work.
Not so fast! Even with today’s awesome technology, there are still bank transactions that we recommend recording manually. They are:
The above transactions are best recorded manually for the following reasons:
- Timing. Transactions should be recorded on the date that they take place. Bank feeds record checks on the date cashed instead of the date issued, which leads to the next reason.
- Cash flow. We want to know our bank balances at all times. If we wait until checks are cashed, we won’t have an accurate bank balance in QuickBooks. This can lead to overdrafts and bank fees.
- Details. Bank feeds don’t transfer the details from checks, deposits, or transfers to QuickBooks at this time so we want to enter transactions as they happen, with the details we need, and match them to the bank feed download.
You might be asking yourself if we have to enter everything manually. The answer to that is no! Bank feeds work great for debit and credit card transactions!
At Moss CPA we love technology! However, the best practice for recording transactions in QuickBooks is still a mix of manual and electronic entry. Recording transactions in QuickBooks in an accurate, timely manner is the foundation to a strong accounting system.
Best Practices: The Five R’sPosted on November 27th, 2017
Accounting is an art, not a science.
It’s something accountants hate to admit but ultimately need to acknowledge in order to work together. In accounting, the same result—a bank account reconciliation, for example—can be achieved in multiple ways. Some people prefer the old-fashioned pen-and-paper method; others prefer to use their accounting software.
Although we have our preferred accounting methods that we at Moss CPA consider best practices, not all accountants do things this way. Our method is just one of the many things that distinguish us from other firms.
Following is Moss CPA’s approach to accounting, which centers on the Five R’s:
- Recording transactions in a timely manner
- Reconciling your accounts
- Reviewing your records and transactions regularly
- Reporting your financial data accurately
- Retaining your information and records securely
We’ll explore each of these topics in an in-depth blog post, so check back soon to learn more about our Five-R approach!