Balance Sheet...Explained

Now that we have covered some bookkeeping issues many businesses have, we will dive into some basics about bookkeeping. While bookkeepers are onboard to reconcile and categorize transactions, they can provide much more benefit to your business. Having someone designated to do only bookkeeping tasks will enable these benefits to shine through. Outsourcing this task to someone who handles other businesses is a way to get the best bang for your buck.

Monthly reports that bookkeepers can provide you with can show you how your business is performing, how much money you have in the business, and areas in which your business could improve. All three together are very important to get a clear picture of the financial health of your business. The first of these reports we will talk about today is the Balance Sheet.

The Balance Sheet is a snapshot of the financial state of a business at a particular point in time. The date of this snapshot can be found in the heading of the report. The contents are only accurate for that day. As we get further into the explanation you will understand why.

The foundation to accurate accounting begins with the accounting equation. All business owners need this to be accurate in bookkeeping. The equation is:

 

Assets=Liabilities+Equity.

Basically, in layman’s terms, this is:  

 

What you Own (assets) = What you Owe (Liabilities)+ What’s left Over (Equity).

The three O’s can help keep this sorted out in your mind. With that equation in mind, let’s go over what is included on the balance sheet and why this can be a powerful tool in determining the health of your business.

Assets

The first items listed on the balance sheet are the Assets. These are the things your business owns. A business has current assets and noncurrent assets. The difference between the two is the length of time it will take to turn the asset into cash. Current assets can be turned into cash within one year. This can include cash, obviously, inventory, supplies, accounts receivable, and prepaid insurance. Noncurrent assets are assets that will take longer than a year to turn into cash. These may include investments, land, buildings, equipment etc. These items are things the business owns that can add value to the business.

Liabilities

Now, let’s go to the other side of the equation. We will begin with liabilities. Liabilities include everything the business owes. As with assets, liabilities can be considered current and noncurrent. This refers to the amount of time it will take to pay off the liability. A current liability can be paid off within one year, and a noncurrent liability is one that will take longer than one year to be paid. Current liabilities can include the current portion of  long term debts, bank debts, accounts payable, wages payable, taxes, rent, utilities, etc. Noncurrent liabilities include long term debts, pension fund liabilities, deferred tax liabilities. These liability items are the monies owed to someone outside the business.

Equity

Next, we add equity to the liabilities. Equity is what we have left over. This is sometimes referred to as shareholder’s equity, or stockholder’s equity. This is the amount of money that is attributable to the business owner. Since you can determine equity by subtracting liabilities from assets, equity is sometimes referred to as “net assets”.

Interpreting the Balance Sheet

As I mentioned previously, the balance sheet is a snapshot of the financial state of the entire business at a particular time. This is a very comprehensive view of the business and possibly the most important report of the three. Keep in mind, the information on this sheet can change daily. The best way to use this tool is to compare it to previous reports. This will give you a broader picture of how the business is performing. There are two other reports that we will discuss next which complement this report to give you a broad view of your business. These reports are the Income Statement and the Statement of Cash Flows. You should be viewing these each month as tools to show you in which direction your business should be moving.

 

Communication is KEY

In the last blog post we talked about getting away from the DIY method of bookkeeping. We discussed the importance of finding a skilled bookkeeper to assist in the important needs of the financial side of the business. This saves time and frustration and helps you keep the more of the money you are making.

It’s not enough just to have a bookkeeper hired. Communication with this person is vital to the success of this relationship. Without it, things can fall apart fast. Our finances can hold some important and very personal information about our lives. Letting someone handle this part is not always an easy thing to do. The bookkeeper should be kept in the loop for all financial decisions. Open and honest communication with your bookkeeper is key to the financial success of your business.

Regular meetings, emails, and phone calls can all help with the communication process. Good advisory bookkeepers will provide you with  monthly financial reports. These reports should include an income statement, a balance sheet, and a statement of cash flows. It is imperative that your  bookkeeper is capable of explaining and interpreting each report for you. These three reports will show you where your business is and where it needs to go next.

So, when you are considering hiring a bookkeeper you should look for someone who is knowledgeable about their work, motivated to be consistent and up to date with your financial information, and effective in communicating the work they are doing.  Good communication  goes both ways.  You and your bookkeeper must have a high level of trust and understanding with each other because sometimes hard conversations must happen within the context of finances. A good bookkeeper should be able to handle these with professionalism and grace.

 

Statement of Cash Flows... What is it and Why Should you Care

The Statement of Cash Flows (SOCF) is one of the big three financial reports. The Balance Sheet, Income Statement and the Statement of Cash Flows should be studied each month. Like the Income Statement, The Statement of Cash Flows depicts performance during a specific period of time as opposed to the balance sheet which is a snapshot of what is going on with the business at a specific point in time.

 

You might be wondering why we are looking at both the Income Statement and the Statement of Cash Flows.They seem similar in nature, however, they look at business finances from two different perspectives. The Income Statement is on the accrual basis of accounting. The income and expenses have been incurred, but may or may not have been received or paid out. The Statement of Cash Flows, on the other hand, is reported using the cash basis of accounting. This report will give a picture of how the cash is actually flowing through the business.

 

When comparing the two statements you will want to look at the net income versus the cash flow. If the cash flow is greater than the net income this is a positive for the business. If, on the other hand, the cash flow is less than the net income, this is bad for business and is unsustainable. In case you are wondering, it is almost impossible for the two to be equal in value.

 

You are looking for trends here. There will be months in your business where the net income is less than the cash flow.  It may just be the way the numbers happened to line up that month. If this becomes a trend, however, and stays this way, changes in the business should be made to get this turned around. The overall goal here is to keep the cash flow greater than the net income.

 

The SOCF is broken down into three different areas. We will be looking at cash flow through the operating activities, investing activities and financing activities. The balance sheet and income statement break the information down in the types of accounts.

 

Operating activities are presented first on the statement. These are the income and expenses directly related to the operations of the business. The income and expenses are converted from the accrual basis to the cash basis.

 

Investing activities are the items related to the investments within the business. These could be the buying or selling of long term investments not related to business. More likely these would be the purchase and sale of property, land, equipment etc.

 

Financing activities are related to the the paying out of dividends to stockholders within a business. These could also be buying and selling of the company’s own stock or membership interest, but this is less common.

 

If you are studying the Statement of Cash Flows and find something that you would like to change, keep in mind, when any asset (except cash) increases, the cash flow decreases. Likewise, when a liability or equity account increases, cash flow increases The inverse is also true.

 

Looking over assets and liabilities will help you pinpoint areas in your business that could change to increase cash flow as well as show you areas where cash could be used to benefit your business. Understanding how these activities affect cash flow could be of major benefit to your business.

 

The Statement of Cash Flows is one of the more difficult statements to understand within the three reports. It is however one of the most important in a business. Cash is king when it comes to business and without it, no business is sustainable.  

 

DIY...Not always the Best Route

I’m going to confess that I love to watch HGTV. I like seeing all the home improvement shows and the transformations that can take place in an hour long show. When I watch a show I get inspired to change something in my own home. I want my house to look like theirs. I think, “That looks pretty easy, effortless even. I can do that.”, only to find out I don’t have the proper skills and tools to make these transformations happen.

I grew up in a home with a professional DIYer. My amazing dad transformed a house from a small rancher into an amazing product and a wonderful house in which to grow up. He is the exception to the DIY rule. Normally, when someone takes on the project like the one he tackled, it ends in disaster.  As a child, I thought, and still think, my dad is totally awesome, knowledgeable, and talented. Now, I will tell you, this project took a little more than the 45 minutes that HGTV portrays on their shows. In fact this project started in 1983 and, well, to be honest, I don’t know if it is finished yet. He takes on projects like this for the pure joy of it. Designing and building houses, and creating beautiful things out of wood, are passions for my dad. He does these things because he likes to and knows how.

Doing things yourself in your home or business can add joy, fulfillment, and pride to your work. It can sometimes save a lot of money. When a business is just beginning, it can be a good idea for you as the owner to be a part of as many aspects of the business as possible. You need to be knowledgeable about what is going on and the systems and procedures that define how things work and run. As the business grows, best practice is to begin replacing yourself in roles that are not specific to your skill set. You should separate the areas where you add the most value to the company from the areas where it would be beneficial to hire help. Continuing in a DIY mindset can overwhelm and overload business owners eventually costing the business money and leading to burnout.

Bookkeeping is an area that can be hired out. Having a competent bookkeeper to handle the books can be extremely beneficial in that bookkeepers have the skills to do the job quickly and efficiently. They can provide a second pair of eyes to find errors and make suggestions. Some bookkeepers specialize in  specific niche industries and work with several businesses similar to your own. The benefit here is having someone who is looking at your business with a little larger lens enabling them to give benchmarking advice and keeping you informed about how your business compares to others similar to yours.  Good bookkeepers can advise you as to where you can save money  and where you can spend more money to make more. They can help put together budgets and can take on a financial adviser role for your day to day operations.

 

So, doing things yourself is possible and can be very rewarding initially. However, there comes a time in the life of every growing business where help is a necessary part of the process. I would love to continue the conversation about your specific business and any bookkeeping frustrations you may be having. Please let me know what kind of help you need.

Reconcile Each Month

Hello, I am so glad you are here and reading this blog post. This one post, above all others, deals with what I believe to be the most important part of bookkeeping. Everything leading up to this point sets the stage for this most important step. If the systems we have already discussed are in place and being used, then this next step should be a breeze.  This aspect of bookkeeping ensures that your books are in order, gives you a clear picture of the financial health of your business, and provides information about how to move your business to the next level. Performing this step can greatly impact your business in a positive way, just as not performing it can impact your business negatively. This step is all about maintenance, where a little work on a regular basis will save a lot of time and money down the road. We all know there is a financial deadline looming each year for businesses and individuals. This date is usually around April 15 and it is known as tax day. It is published in many calendars. It is on our devices,  Many restaurants give away food as a reward for completing this monumental task. Imagine that by mid January you were able to contact your accountant and simply email him or give him a thumb drive containing all of your financial records from the previous year. Imagine a time of tranquility during the first quarter. One where you can continue to focus on your business.  Where you do not need to spend your valuable time hunting financial documents, bank and credit card statements, etc. only to send them to your accountant and pay a pretty penny for him to sort through them to find the information needed to file your tax return.

There is a way and it doesn't have to be time consuming or overwhelming. Consistency is key to this step. Ok, I have given lots of positives and built this thing up so here it is. Reconcile your accounts each month. That’s it. Make sure your statements are recorded, categorized, and the amounts from the bank match the amounts you have recorded. The way you reconcile and the amount of time it takes depends on the systems you have set up for bookkeeping. A pen and paper system is more tedious than bookkeeping software, but nonetheless it needs to be done on a consistent basis, each and every month.

A good time to do this is at the end of each month. Dedicating a morning each month to this task helps keep things under control. There are also bookkeepers who are trained to deal with this task. Looking into this option would free up more time for you to focus on your business. Let me know if you need any assistance in this area. Start this soon and you will be thankful when tax time rolls around next year.

 

Tracking Reimbursable Expenses

As we continue with our series where we deal with common bookkeeping issues and how to fix them, the topic of today's post can  be completely avoided if all business expenses are kept separate from personal expenses 100% of the time. However,  this is not always possible making reimbursement of personal funds necessary.

 

Let’s first define Reimbursable Out-Of-Pocket Costs. According to investopedia.com these consist of cash payments that an individual or company incurs on behalf of the company which will be refunded sometime in the future. While some of these costs may have personally benefited the employee, companies are willing to repay employees for incurring these expenses, because they come about as a result of performing their job.

 

So, given that definition, let’s think about a time when these types of expenses might occur. Let's say your business employs a sales staff. There will be times those employees meet with potential clients.  A typical reimbursable out-of-pocket cost for the sales representative could be a restaurant bill from courting the potential client or the cost of gas to drive to a sales course in a neighboring city.


It is very important to set clear guidelines for employees to track, record, and submit necessary paperwork to receive the correct amount of reimbursement. Equally important is to create policies defining which types of expenses are reimbursable and which are not. Retaining all receipts and recording thorough explanations of all expenses  helps streamline the process of reconciling those expenses down the road.  

 

  

 

 

Put Expenses Where They Belong

When thinking about organizing our lives, a saying to remember is “A place for everything and everything in its place.” When each of our belongings has a place to go, it makes it much easier getting the house ready for company or tidying up the office after a long week to prepare for the week to come.    Your business accounts will thank you when you have a place for each transaction. A wonderful tool that is vital to all bookkeeping systems is a Chart of Accounts. This labels each account with a name and a number so you will learn where each transaction  goes.     Let’s back up a minute. You might be wondering, “What are you talking about?  What is a Chart of Accounts?”  Well simply put, it is a list of accounts used to classify transactions. This tool organizes all transactions by putting each one in a specific place so you will know where your money is going, where income is coming from, etc. Most accounting software packages have a Chart of Accounts built in that can easily be customized for your accounting needs. These Charts of Accounts are not necessarily complete, but make good starting points that can be added to or deleted from to fit the needs of your business. Within the each software package you will find accounts and account types. If you are not currently working with accounting software,  a Chart of Accounts can also be set up manually on a spreadsheet, or even on a hand written chart on paper. The important thing here is to get it set up to begin organizing transactions.     Some account types you will use include bank, credit card, cost of goods sold, income, and expenses. You name each account, then assign it an account type. It is best practice to also assign a 4-digit number to each account. As you can guess, there is a system for setting up these numbers as well. Each account type should begin with the same number. This will make it easy to find certain accounts within the chart of accounts.     This may seem like a tedious task at first, but if set up properly, it can be a tool that will make life easier from a bookkeeping standpoint. In the next blog post, we will be talking about the importance and the process of monthly reconciliation of your business’s books.     If you don’t have a chart of accounts set up, this step will make your monthly work so much easier. Go ahead and get started on this then we will talk later. Please let me know if you have any questions or if I can help you in any way. Good luck and go make that Chart!!    

When thinking about organizing our lives, a saying to remember is “A place for everything and everything in its place.” When each of our belongings has a place to go, it makes it much easier getting the house ready for company or tidying up the office after a long week to prepare for the week to come.

Your business accounts will thank you when you have a place for each transaction. A wonderful tool that is vital to all bookkeeping systems is a Chart of Accounts. This labels each account with a name and a number so you will learn where each transaction  goes.

Let’s back up a minute. You might be wondering, “What are you talking about?  What is a Chart of Accounts?”  Well simply put, it is a list of accounts used to classify transactions. This tool organizes all transactions by putting each one in a specific place so you will know where your money is going, where income is coming from, etc. Most accounting software packages have a Chart of Accounts built in that can easily be customized for your accounting needs. These Charts of Accounts are not necessarily complete, but make good starting points that can be added to or deleted from to fit the needs of your business. Within the each software package you will find accounts and account types. If you are not currently working with accounting software,  a Chart of Accounts can also be set up manually on a spreadsheet, or even on a hand written chart on paper. The important thing here is to get it set up to begin organizing transactions.

Some account types you will use include bank, credit card, cost of goods sold, income, and expenses. You name each account, then assign it an account type. It is best practice to also assign a 4-digit number to each account. As you can guess, there is a system for setting up these numbers as well. Each account type should begin with the same number. This will make it easy to find certain accounts within the chart of accounts.

This may seem like a tedious task at first, but if set up properly, it can be a tool that will make life easier from a bookkeeping standpoint. In the next blog post, we will be talking about the importance and the process of monthly reconciliation of your business’s books.

If you don’t have a chart of accounts set up, this step will make your monthly work so much easier. Go ahead and get started on this then we will talk later. Please let me know if you have any questions or if I can help you in any way. Good luck and go make that Chart!!

 

Petty Cash Part Two: Managing the Money

    Okay, I assume we are all on the same page now and we have our petty cash set up and ready to go. Now that you have a good working system in place you need to make sure it is properly managed so the petty cash account will work for you and not against you.        Replenishing the fund.   The accounting clerk needs to replenish the amount of cash in the petty cash fund whenever the fund balance reaches a predetermined minimum. The custodian should start a new log each time the fund is replenished. To initiate the replenishment process, the custodian gives the completed list of expenditures along with labeled receipts to the designated accounting clerk. The clerk then checks over the receipts to make sure the receipt totals equal the amount spent from the petty cash fund and writes a check to the custodian for the amount spent to replenish the fund.       The custodian then cashes the check and deposits the funds in the petty cash box, restoring the beginning balance of the petty cash fund.       The amount of money in the petty cash fund can be altered based on use. If this account is not being used very often, it might not need to be replenished as often. It is best practice to replenish the account monthly to keep track of expenditures and keep this account up to date.       If, on the other hand, your business consistently needs more money in the petty cash fund, the amount can be increased at any time. Make sure changes are documented with the accounting clerk as well as the custodian.  The same process described above is then followed with the new amount.        2.    Account for the petty cash transactions.   The petty cash custodian takes the completed list of transactions along with the receipts to the accounting clerk. The accounting clerk then double checks that there is a receipt to match each transaction.        It is very important that the total of the receipt value plus the present fund balance equal the total that was deposited in the petty cash fund. For example: If the petty cash fund started at $100 and has reached $10, then you should have receipts that are valued at $90 total. If these numbers do not match, then there was an expense that was not accounted for. The missing receipt must then be found.       The receipts are then sorted into appropriate categories and the receipt total for each category is calculated. There is no need to list each transaction individually. Log them as complete sums under each category. Some common categories that might be included in petty cash expenses are postage, transportation, and office supplies.          3.   Log the expenditures.   After sorting and totaling the receipts in each of the expense categories, the accounting clerk should properly record the expenses associated with the petty cash receipts.       He should credit the cash account first for the total amount of the reimbursement to petty cash, which reduces the balance of the main cash account by the same amount.       He should then debit the individual expense accounts for the sums spent in each. The total debit in the expense accounts will equal the credit of the petty cash account.       For example, if you have $200 in petty cash receipts, you need to record  amounts in the appropriate expense accounts that total $200. If all the $200 were "office expenses," you would debit the office expense account $200.       The accounts for each type of expense will increase by the amount spent in each category to show that the company spent that much on those items. Then, the net income of the company will decrease by the amount spent on the expense statement.       This may seem like a lot of information for a seemingly insignificant account in the life of your business. The petty cash account, while it is intended to handle several small expenses, can add up to be a big headache if not properly managed. The more you work on your business setup and systems, the better your business will work for you. I hope you found this helpful.  Please send any questions my way.    

 

Okay, I assume we are all on the same page now and we have our petty cash set up and ready to go. Now that you have a good working system in place you need to make sure it is properly managed so the petty cash account will work for you and not against you.

 

Replenishing the fund. The accounting clerk needs to replenish the amount of cash in the petty cash fund whenever the fund balance reaches a predetermined minimum. The custodian should start a new log each time the fund is replenished. To initiate the replenishment process, the custodian gives the completed list of expenditures along with labeled receipts to the designated accounting clerk. The clerk then checks over the receipts to make sure the receipt totals equal the amount spent from the petty cash fund and writes a check to the custodian for the amount spent to replenish the fund.

 

The custodian then cashes the check and deposits the funds in the petty cash box, restoring the beginning balance of the petty cash fund.

 

The amount of money in the petty cash fund can be altered based on use. If this account is not being used very often, it might not need to be replenished as often. It is best practice to replenish the account monthly to keep track of expenditures and keep this account up to date.

 

If, on the other hand, your business consistently needs more money in the petty cash fund, the amount can be increased at any time. Make sure changes are documented with the accounting clerk as well as the custodian.  The same process described above is then followed with the new amount.


 

2.  Account for the petty cash transactions. The petty cash custodian takes the completed list of transactions along with the receipts to the accounting clerk. The accounting clerk then double checks that there is a receipt to match each transaction.

 

It is very important that the total of the receipt value plus the present fund balance equal the total that was deposited in the petty cash fund. For example: If the petty cash fund started at $100 and has reached $10, then you should have receipts that are valued at $90 total. If these numbers do not match, then there was an expense that was not accounted for. The missing receipt must then be found.

 

The receipts are then sorted into appropriate categories and the receipt total for each category is calculated. There is no need to list each transaction individually. Log them as complete sums under each category. Some common categories that might be included in petty cash expenses are postage, transportation, and office supplies.



 

3. Log the expenditures. After sorting and totaling the receipts in each of the expense categories, the accounting clerk should properly record the expenses associated with the petty cash receipts.

 

He should credit the cash account first for the total amount of the reimbursement to petty cash, which reduces the balance of the main cash account by the same amount.

 

He should then debit the individual expense accounts for the sums spent in each. The total debit in the expense accounts will equal the credit of the petty cash account.

 

For example, if you have $200 in petty cash receipts, you need to record  amounts in the appropriate expense accounts that total $200. If all the $200 were "office expenses," you would debit the office expense account $200.

 

The accounts for each type of expense will increase by the amount spent in each category to show that the company spent that much on those items. Then, the net income of the company will decrease by the amount spent on the expense statement.

 

This may seem like a lot of information for a seemingly insignificant account in the life of your business. The petty cash account, while it is intended to handle several small expenses, can add up to be a big headache if not properly managed. The more you work on your business setup and systems, the better your business will work for you. I hope you found this helpful.  Please send any questions my way.

 

Petty Cash Part One: Setting Up a System

Most business transactions are automated for ease and efficiency. Having these transactions electronic in nature by using apps, accounting software, online banking etc. produces  accurate, organized records with little effort. There are times however when checks and cash are necessary for business.

Petty cash can be defined as an accessible store of money kept by an organization for expenditure on small items. This store of money is sometimes used for small purchases such as office supplies, or shipping charges. Writing checks for such items can become time consuming and expensive.

 

Most business owners operate with a small amount of petty cash and may have little knowledge of how to track it. It should be a priority to install a system that tracks the cash kept on hand and what it is being used for. We have discussed the importance of systems in previous posts. The more thorough you are with a system from the beginning, the better the system will work for you and the less work it will be to maintain.  There are a few steps to get the petty cash system up and running.

  1. Purchase necessary tools. The first tool you will need is a lock box. You can find these boxes at office supply stores. Make sure it is small enough to easily fit in a desk drawer for storage, as well as large enough to hold the necessary amount of cash. The lock can be either a combination lock or a key, whichever works best for your business. Make sure it is secure and not easy to tamper with.

  2. Name a keeper of the fund.  This person is usually called the custodian of the petty cash fund. Whoever is chosen, besides being trustworthy, should also be easily accessible to employees. Their responsibilities include: reimbursing cash in return for receipts, recording all transactions and replenishing cash from time to time.

  3. Find a place out of sight for the box. Once the lock box has been purchased and the custodian has been chosen, there should be a specific location chosen for this box. It should be out of sight, preferably in a desk drawer. This drawer could also be locked for added security. The key for the lock box should not be stored in the same drawer. It should be in a different location, possibly on the key chain of the custodian.

  4. Determine withdrawal amount. The petty cash system is not meant to replace the accounting system for your business.  As I said before, it is meant for small purchases. While setting up a system, determine the maximum amount allowed to be handled with petty cash. Purchases over this set amount should be handled through other purchasing procedures.

  5. Fund the Fund. Once these basics have been set up, it’s now time to put money into the box. A check should be written to the custodian.  The check is  then cashed and the cash placed in the box. There are several factors to consider when determining what money to put in the box. You will need enough to cover typical expenses but not too much as to tie cash up from the business or encourage theft.  Normally the amount is between $100 and $500. Be sure to keep a range of denominations of bills in the lock box. You will need a few 20’s and 10’s and plenty of 5’s and 1’s. Also include coins to be able to give exact change with little hassle.

  6. Keep track of transactions. Once the cash is in the box, it is necessary to set up a log to record all transactions that occur. This can be a simple hand written chart, or a spreadsheet. There should be a column for a description of the transaction (office supplies, stamps, etc) a column for the amount spent, a column for who used the petty cash, and a column for the date. Also include a place to record deposits into the account. The first deposit should be recorded as a petty cash deposit and all withdrawals will be deducted from that amount. Each time funds are replenished, a new log should be started.

  7. Work with the accountant to get this account on the books. The petty cash account is funded through the cash account. Both are considered assets for the company. To set up the fund, simply transfer funds from the cash account to the petty cash account. This transfer will have no effect on the balance of assets. The petty cash account will become like all other accounts and should be tracked as one.

  8. ...And go. Once the business has cash in the box, employees can begin using the cash for small expenses. Every time funds are disbursed from the petty cash account, the custodian should require a receipt. The receipt should include the date of the purchase as well as the name of the purchaser and should be stored in the box. The purchaser should then receive the exact amount of the purchase back from the custodian.

Hopefully you will take time to set up a system that will work well for your business. The petty cash system can be a wonderful addition to your financial management. In the next post we will continue talking about petty cash. We will go deeper into managing the expenditures in this account.

Keep Receipts Organized

All businesses incur expenses regularly. These can come in many different forms. There are office supplies, lunches out with clients, transportation, monthly expenses to run the business i.e. website fees, phone/internet bill, utilities etc. Most business expenses are deducted from the income of the business therefore lowering the amount of taxes paid. These expenses can only be deducted with proper documentation in the form of a receipt. IMPORTANT: The IRS requires receipts to verify purchases. Credit card and bank statements do not qualify as receipts. For example, a business might have a $200 purchase on the company credit card to Staples. Without the receipt there is no proof that this was only for office supplies.

 

So, now you might be thinking, there is already a lot to keep up with in my business and managing receipts is another tedious task to pay attention to regularly. While this is true, receipt organization can be easier than you may think. Today I will give you some tips on how to best organize receipts to keep your accountant happy and take advantage of a valuable tax break for your business.

 

First, I would advise you to keep all receipts together. Each day place all receipts in the same place. This can be a jar, a folder, or whatever you have to collect things in.  Make sure you are aware of where receipts can be found. Check in shoe boxes, filing cabinets, folders, your wallet, and car, email, on your phone.

 

Then, at the end of each month, while you are reconciling your business account, input your expenses into a spreadsheet or accounting software. These expenses should be categorized as specifically as possible. This task serves you best if completed monthly.

 

This can be done manually or you can speed up the process using digital receipt management tools. There are a few methods out there to help keep things orderly and easy to analyze.

 

  1. Shoeboxed This app has many helpful features. It can archive and organize receipts, track mileage, even automatically archive receipts from Gmail. They also have prepaid envelopes you can stuff with actual paper clutter, mail it to them and Shoeboxed will digitally organize that data as well. These are just a few of the helpful features of this app. Cost: Basic is $9.95/month, $100/year. 

  2. OneReceipt This app seems to be a simplified version of Shoeboxed. This also gives the option of linking to an email and will extract and categorize the information found on the receipts. They also provide a monthly report of the receipts and you can keep up with whether or not you are on budget. Cost:Free

  3. www.itemize.com Like OneReceipt, this app can get e-receipts from your email account. It automatically extracts data and can instantly create expense claim forms. Cost:$8.99/mo

  4. Excel/Google Spreadsheets If you prefer a more manual approach to receipt organization, this method is for you. Simply set up a spreadsheet of the expense categories you are able to deduct and input the receipt information on a regular basis. Keep in mind, unlike the above mentioned apps, you will need to keep the physical backups of the receipts. This again, is your proof to the IRS that each deduction is legitimate.  Cost: Free

  5. Pen and Paper: For those of you who want to do it old school-style, this method is not nearly as automated or efficient come April 15, but it works for thousands of people!

You can do this in a number of ways, including:

  • Buy a spiral notebook. Tape receipts into the notebook, one per page, and scribble any additional information onto the page.

  • Copy your receipts with a copy machine so that you get a clean, unwrinkled 8.5x11” sheet, and then store it in a filing cabinet with appropriate labels.

  • If you don’t have many receipts, just take a basket, put it in your office, and throw receipts into it. While this is not a very elegant method, having one easily-accessible place where you put all your receipts can serve as a reminder to hang on to them in the first place. You will have to sort through them at the end of the year.

Cost: $2 for a notebook, miscellaneous expenses for copy paper and ink.

Either route you go, the most important thing is to keep your receipts organized to make audits and record keeping as simple and accurate as possible.