Are you a small business owner, CEO or CFO trying to determine which financial professional you need for your organization? Both Certified Public Accountants (CPAs) and Bookkeepers are important roles in any finance department, but they have different responsibilities. Here’s what you need to know about the difference between CPAs and bookkeepers.
What Does a CPA Do?
A CPA is responsible for providing financial advice, managing taxes, and auditing financial records. They typically focus on long-term planning for businesses as well as individuals. CPAs also analyze complex financial data and create solutions that can help businesses reduce their taxes or increase profits. A CPA may also work with other professionals such as lawyers or consultants to provide the best advice possible.
What Does a Bookkeeper Do?
A bookkeeper is responsible for maintaining accurate financial records of a business’s daily transactions. Common tasks include tracking accounts receivable, accounts payable, payroll, budgeting, and invoicing. The goal of a bookkeeper is to ensure that all transactions are properly recorded so that accurate financial statements can be generated each month. While bookkeepers don’t usually provide long-term strategies or tax advice like CPAs do, they can assist with analyzing data and making sure everything is up-to-date and accurate. This helps the business make informed decisions by having reliable data on hand at all times.
It’s important to understand the differences between CPAs and bookkeepers when hiring for your organization’s finance team – both play an essential role in helping you reach your goals! While CPAs provide strategic guidance on long-term planning and reducing taxes, bookkeepers keep track of day-to-day operations by tracking expenses and generating accurate reports from this data. Together, both roles are critical components of running an effective finance department!
A balance sheet is an essential financial document that provides a snapshot of your business’s assets, liabilities, and equity. It serves as a way to track the health of your company by revealing how much money you have coming in and how much money you are spending. But what exactly do all of those assets mean? Let’s take a look!
What are Assets?
Assets are items that have value and can be owned or controlled to produce value. On a balance sheet, they can represent anything from cash to accounts receivable. They can also include tangible items such as machinery and equipment, real estate, vehicles, furniture, inventory, and buildings.
Examples of Assets
Cash
This includes both physical cash on hand as well as funds held in bank accounts or other liquid investments. Cash is important for day-to-day operations because it allows businesses to pay bills, purchase supplies, and make payroll.
Account Receivables
These are payments owed by customers who have purchased goods or services from your business but have yet to pay for them. Accounts receivable is an important asset because it reflects future revenue that has not yet been recognized in the current period.
Investments – Investments include stocks, bonds, mutual funds, etc., which may be held for investment purposes or income generation. Holding investments helps diversify risk within a portfolio and potentially generate returns over time.
Equipment
Equipment refers to any machinery or tools used in order to run the business such as computers, desks, printers, vehicles, and more. Equipment is important because it enables the business to carry out its operations efficiently.
Inventory
This includes any products or materials that are held for sale by the company. Inventory must be tracked closely in order for a business to maintain healthy cash flow levels since selling inventory generates immediate revenue for the business.
As we can see from this quick overview of assets on a balance sheet, understanding what each asset means can help small business owners better manage their finances and stay on top of their financial goals! By familiarizing yourself with these common assets—cash accounts receivable investments equipment inventory—you will get one step closer to achieving financial success!
If you own a small business, you might find yourself asking the age-old question: How does a bookkeeper close out the books for the CPA? It’s an important question—after all, your accountant can’t prepare your taxes without accurate and up-to-date financial statements. Fortunately, we have an answer. Let’s dive into how a bookkeeper closes out the books for the CPA.
Organizing Financial Records
The most important step in closing out the books is making sure that all financial records are organized and up-to-date. This means that all transactions must be recorded accurately, either in a physical ledger or in accounting software. It’s also important to make sure that all accounts are reconciled and any discrepancies are resolved before sending them off to your accountant. Doing this will help you avoid any potential headaches down the line when it comes time to prepare your taxes. As bookkeepers, we handle this on a regular basis throughout the year. At year-end, we complete extensive reviews to ensure accuracy.
Recording Adjusting Entries
Once bookkeepers have ensured that all of your financial records are in order, it’s time to record any necessary adjusting entries in order to ensure accuracy. This includes recording accruals such as unpaid wages, prepaid expenses, and accrued income. Interest on loans must be recorded and reconciled. Payroll reconciliations involve ensuring that the payroll recorded in the books matches the quarterly and annual reports provided to the state and IRS. Double-checking that the Accounts Receivable and Accounts Payable are accurate is another step to confirming that the books can be closed out accurately. These entries must be made prior to closing out the period so that they can be accurately reflected on the financial statements sent to the accountant.
Closing Out Accounts
The final step is closing out any accounts that need to be closed for tax purposes or other reasons. This involves transferring any balance from one account to another (e.g., from a current asset account such as Cash to an income account such as Revenue). This ensures that all accounts reflect their correct balances as of the end of the fiscal year or period being closed out for review by your accountant or auditor.
Closing out books for a CPA can seem daunting at first glance but it doesn’t have to be! With careful organization and attention to detail, we can close out your books before sending them off for review by their CPAs or auditors. By following these steps—organizing financial records, recording adjusting entries, and closing out accounts—you can rest assured knowing we are well on our way towards preparing accurate financial statements for review by your CPAs.
There are 3 main financial measures that provide you, the business owner, with the financial health of your company:
Profit and Loss
Balance Sheet
Cash Flow Statement
Income Statement
Today we are going to take a deeper look at the Profit and Loss, otherwise known as the Income Statement. In a nutshell, the Profit and Loss shows you if your business is making money or not. The Profit and Loss shows you the summary of your revenue or income in relation to your expenses over a period of time.
Your income for your business is the money you are making from your clients. You are charging your clients for a product or a service that your business provides. Maybe you are providing ski lessons and charging your clients for your expertise. Maybe you are making delicious cookies and selling cookies to your clients. Either way, the money you are generating is your income or otherwise known as your revenue.
On the flip side, your business is spending money. You have to purchase your raw materials or pay for software. Maybe you are buying chocolate chips for cookies. Maybe you need software so that clients can book a lesson. You will have insurance for your business. You might have utilities or rent. Perhaps you are paying for labor. Whatever those expenses might be, it is important to know what you are spending, especially in relation to your revenue.
Net Profit
Your net profit is the difference between your income/revenue and your expenses. Your business is profitable…in other words, you are MAKING money if your income is more than your expenses. This is where you want to be. On the other hand, you are at a LOSS if your expenses are more than your income. You won’t know if you are in that position unless you are keeping an accurate set of books.
As a business owner, you MUST know this about your business. You have to know if you are profitable or not in order to make decisions about your business.
The Profit and Loss is a measure of your business over time. We can look at your Profit and Loss for a month at a time, a quarter at a time, or for a full year. Larger periods of time give you important big-picture information. Smaller periods of time might show you that in April your expenses are very high compared to your income. Maybe you have software subscriptions that get renewed in April. Or you might see that in October your revenue drops. No one is skiing in October. Can you figure out how to make some passive income in October or offer specials for the upcoming season? Those types of analytics help you make changes or adjustments in your business so that you can cover seasonality or patterns.
Now let’s talk a little more in-depth about the types of revenue and expenses.
Categorize Revenue and Expenses
For a small business, the revenue is typically fairly easy to categorize. You might be an electrician so you are providing a service and selling parts. You can group all of your sales into one category and simply call it sales. Or you might want to break it into two categories:
Services
Sales of Product
This would give you additional detail about how your business is making money. These should be big-picture categories.
Expenses are a little more complicated because you need to categorize these based on tax rules in order to consider them deductions.
These categories can include items like:
rent
insurance
subscriptions
utilities
payroll/labor
gas
raw material costs
cost of goods
etc.
These must be carefully categorized to fully take advantage of your allowed deductions…a topic for another day but just remember, categorizing your expenses will save you in taxes.
Remember, regardless of how many categories you have, your total INCOME/REVENUE minus your total EXPENSES will determine your profitability.
Make Good Business Decisions
In a nutshell, are you making money? Is your business in the red or in the black? I like to tell my clients, while you might love what you’re doing if you’re not making money, then this is just a hobby. You better REALLY love your hobby if you’re willing to lose money! It is important that you know if you are making money or not. If you’re losing money, you might throw in the towel and read a good book…
If you are making money, how can you maximize your revenue? How can you minimize the time you spend working in the business by hiring appropriately? How can you determine when you should buy that new piece of equipment your business needs?
Your profit and loss or income statement can help you steer your company into a path of success. Questions? Feel free to contact us!
If you own a business or are planning to start a small business, these are the essential practices to ensure that you are financially responsible. These steps will set your business up for success.
1. Obtain an EIN number:
An EIN number is essentially a social security number for your business. By obtaining an EIN number, you are creating a level of separation between you personally and your business. You will need to provide your EIN number to others as you do business. This way, you are protecting your Social Security number and preventing identity theft.You can contact a professional to help you, or if you are comfortable, you can set this up by navigating the IRS website.
2. Open a bank account in the business name
Open a business bank account. Deposit all your income into this account and pay for all of your expenses from the business bank account. This will ensure that your bookkeeping is simple and accurate. It legitimizes your business. It captures your income and expenses for tracking profitability and preparing for taxes.
3. Form relationships with professionals
Every small business should have relationships with professionals who will help ensure the success of the business. These relationships include: lawyer, CPA, bookkeeper and insurance agent at the very least. You will likely also need an IT specialist and a banker. Forming these relationships and hiring the right professionals will foster the growth and success of your business.
4. Do your books
We cannot stress that you must have a bookkeeping system in place. You need to do your books yourself in a timely and accurate manner OR outsource your bookkeeping. This is the core measure of the financial stability of your business. It will help you make decisions about your company. Without an accurate set of books, you cannot file taxes, cannot obtain business financing, and you cannot make informed decisions about your business. We recommend that you use a professional. You might want to do this yourself as a business owner and you might have the skills to do so. As a business owner, you will wear many hats, you will be pulled in a lot of directions and books tend to be put to the bottom of your to do list. Outsourcing them is a great option.
5. Pay your estimated taxes/payroll taxes
Stay on the good side of the IRS by paying your taxes. Keep yourself out of trouble with the IRS and prevent yourself from needing to come up with a lump sum when you file your taxes. It is difficult. We get it. Cash flow is an issue and paying taxes is the last thing anyone wants to do. But you won’t do yourself any favors by skipping these payments. You will need an accurate set of books to determine how much to pay on a quarterly basis.
6. Track your profit
You may have started your business because you have a hobby that you’ve turned into a business. But to stay in business, you must be profitable. Track your profitability by having a bookkeeping process in place and operating.
7. Keep your receipts
You must keep your receipts. Many business owners believe that your bank/credit card statement is sufficient. It is not. If you are audited, the IRS will want to see actual receipts or electronic copies of receipts. We recommend that you store receipts electronically.
Follow these practices to help ensure the financial health of your small business. Bookkeeping and Financial Service Providers such as Incline Business Essentials can help you with these steps.
If you run a business, the act of bookkeeping is essential. Let’s start by defining bookkeeping. What exactly is “Bookkeeping?”
Bookkeeping is the process of recording the financial transactions of your company. Bookkeeping categorizes the money coming into your business as income. Expenses refer to money that your business spends in order to operate. The act of bookkeeping organizes your expenses into categories that are used to file your taxes.
Now let’s talk about why this matters.
File Your Taxes
As a business owner, you will likely hire a CPA to file your taxes. You will need to provide the CPA with your income and your expenses. Your taxes cannot be filed without this information. This leads to the next important reason for keeping an accurate set of books.
Pay Fewer Taxes
This is probably the most attractive reason to have a bookkeeping system in place. Bookkeeping identifies all of your transactions so that nothing slips through the cracks. You must categorize each and every transaction that goes through your bank account. By keeping an accurate set of books, you will know exactly what you spend on gas or office supplies, or advertising. When you are gathering your data at the end of the year, you aren’t trying to remember how much you spent on that new computer or which client you took to lunch in May. Without a clear bookkeeping system, you will invariably miss out on deductions. You must have a plan and a process to ensure that deductions are captured.
Your expenses must be organized into categories approved by the IRS in order to be considered “deductions”. Without deductions, you will pay taxes on the entire income of your business. With deductions, you will rightfully cut this tax bill thereby saving you and your business money. For example, if your business brings in $100,000 without deductions, you might pay the IRS upwards of $25,000. But, if you can clearly show business expenses of $60,000, you might pay $10,000. This is a tax savings of $15K — not just nickels and dimes!
Track Your Profit
Profit is a key indicator of your business’s success. You can only determine your profitability if you are tracking your income and expenses.
Make Decisions About Your Business
Bookkeeping can help you make decisions about your business. Is it a good time to hire? Should you be increasing your prices? Are you spending too much on utilities? These decisions are guided by your business’s financial health.
Financing
In order to get financing for your business, you will need to provide the lender a set of books showing your income and expenses. Banks will require you to show your expenses vs. your revenue, otherwise known as your Income Statement or Profit and Loss. Bookkeeping will provide this report.
Catch Mistakes
Were you overcharged or charged twice for a service? Are you paying for a subscription that you are no longer using? You will catch these transactions through your bookkeeping because you are looking closely at every transaction.
Where Is Your Money Going?
Through bookkeeping, you will understand where your money is going. This will help you budget and plan cash flow for the development of your business.
Bookkeeping will save you money by saving on taxes, cutting down on mistakes, guiding you through financial decisions, and improving your cash flow. Business owners often want to do this on their own. Sometimes this works. But often the books are the piece of the business that well-intentioned owners plan to do and just don’t have enough time in the day.
Bookkeeping is essential but it does take time, pulling you away from your actual business and preventing you from focusing on your clients. As a business owner, you wear so many hats. This is one that you can easily outsource with confidence. Reach out for a complementary consultation to see if our services would be a good fit for your business.
Incline Business Essentials 