Learn to love accounting

My goal in life is to get everyone to love accounting. I don’t think I’m going to succeed but I’ll keep trying. What do I love most about accounting? It’s all about balance. Balanced equations, balanced transactions, balanced books. In these turbulent times, couldn’t we all use a little balance in our lives?  So how can accounting bring some balance to your business life?

Try focusing on managerial accounting. Large businesses have cost accountants, Fortune 500 corporations have whole departments devoted to the discipline. Successful small business owners need to assume this role as well. It is not as scary as it sounds. We are fortunate in this time period to be able to make use of a variety of accounting software programs. Beth and I are QuickBooks Pro-Advisors, but there are many other good programs out there that make accounting and bookkeeping easier for the small business owner.  We have noticed that too many small businesses have only a tax accounting focus to their accounting. We suspect that is because most small businesses use a tax preparer to finalize their books and a tax preparer is naturally focused on what the business needs to file their taxes. It is very important to keep the tax authorities happy! It is also important to recognize that tax accounting is only a small component of the accounting picture.

Managerial accounting is using the information your accounting program or accountant is providing to help you guide your business. This means you must have financial statements prepared and available to you on a monthly basis. This is where the focus shifts from tax accounting which relies only on a year-end statement to managerial accounting which requires monthly statements. Ideally, as the small business owner, you have prepared a budget for your business and you are comparing your actual results to your budget regularly. You should also be comparing this developing and this task will bring these problems to your attention before they reach a crisis point. If your gross profit is less than you expected you need to understand why. Is your main supplier charging more than you anticipated? Are your shipping costs running higher? Do you have an employee theft problem? If your supplier is charging more, do you need to raise your own prices or can you get your sales staff to increase volume and earn you a volume discount. If shipping costs are rising, do you need to add a surcharge to your customers? If you suspect theft, do you need to install security cameras in your warehouse?

In today’s tough economy, no business can afford to be blindly operating at a loss. If you are losing money and you don’t know why, putting on your managerial accountant hat can help you answer the questions and formulate a plan to solve the problems. So do you love accounting a little more? Maybe not, but hopefully you can see how it can help bring some balance to your business life.

Tips for a Painless Sales Tax Audit

I have just been through a Wisconsin Sales & Use Tax Audit with one of my clients and it left me with some tips for all of my small business client.

1. One of the first things you need to do when starting a business is to verify whether your sales are subject to sales tax or not. If none of your sales are subject to sales tax or all of your sales are subject to sales tax, then you do not have anything special to do. If some of your sales are exempt from sales tax, then you need to be sure that you have Exemption Certificates on hand. There is a penalty for claiming the exemption without having the Exemption Certificate from the customer. I recommend filing them alphabetically in a 3-ring binder and if you have the technology, also scanning them and attaching them to your customer record in your Accounting or CRM program.

2. The main area that is being audited lately is the Use Tax as more people are purchasing over the internet. An audit normally consists of an alphabetical sample over the past 4 years. For this reason, I recommend that you file all vendor invoices first by year, and secondly by Vendor in alphabetical order. If you have vendors that you purchase from regularly, they should have their own file. All other vendors can be filed under the first letter of their business name (a generic F file, for example). A normal accounts payable practice is to attach a copy of the check stub to the vendor bill when paid or to write the payment date, amount, and reference number, and account paid out of on the vendor bill if it is scheduled for electronic payment. Be sure that you obtain a vendor bill or receipt for all purchases since it will be assumed that you did not pay sales tax if you cannot produce a receipt. Filing by this method allows you to easily look up any inquiries for internal purposes and also allows you to easily pull the required sample (i.e., 2008 A-F vendors). If you are paperless, this same filing system is appropriate on your computer.

Vendor bills paid with a credit card cause an issue. Some people prefer to attach all invoices to the appropriate credit card when reconciling the credit card and then file the entire bundle under the letter for the credit card company. I prefer to mark on the vendor bills that they were paid by a particular credit card and then file them under the appropriate vendor file. This makes it easier to find a particular invoice as you can look directly in the vendor file and do not have to guess as to what month the purchase happened on the credit card.

3. The purchases that you need to treat with special care are all purchases for which you did not pay sales tax. This means that as each bill is paid, you need to check to see if you paid sales tax or not. If you did not, you need to verify that it falls within the law of items exempt from usage tax. If it does not, then you need to set those bills aside in a "usage tax" file and calculate the usage tax on them when you file your Sales & Use Tax Filing. In particular beware of the following:

• Internet purchases from out of state companies
• Purchases from companies that are normally exempt from tax due to manufacturing or resale but are being used for a purpose different than the reason for the exemption 
• Fixed Asset purchases. Each one of these was looked at separately (no sample was taken).

We have several clients who have so few vendor bills that they file first by the year, and then by a topic (i.e., insurance, purchases, etc), normally in an expandable file folder system. If your vendor bills are small enough to file using this method, that is fine as you will likely have all of your bills looked at instead of a sample anyway.

If a business files timely Wisconsin Sales & Use Tax returns, the records must be retained a minimum of the 4 years open to audit (7-10 is often recommended for income tax purposes anyway). If Sales & Use Tax returns were not filed, then records should be kept for a minimum of 10 years. Exemption certificates marked "Continuous" should never be destroyed.

In Wisconsin there are pen the sample is extrapolated over the 4 years of the audit and interest is calculated at 12% annually on errors. In addition steep penalties can be assessed for failure to produce the documents or failure to use them correctly. If you have any questions related to what is subject to sales or use tax, be sure to ask your accountant  for clarification.