BASICS ACCOUNTING
SMALL BUSINESS OWNERS
MUST KNOW

BASICS ACCOUNTING
SMALL BUSINESS OWNERS
MUST KNOW

Updated: May 19, 2020

Accounts Payable 101

Basically, Accounts Payable is the money your business owes. Your business needs lots of things to be in business: inventory, office supplies, services like phone and internet, the list goes on. And when you accept delivery of these things and you have a term to pay for it, that’s a debt you owe. That debt is a pending outflow of cash and thus an Account Payable. You still have the cash in hand, but you already owe it to someone else.

 

Like with Accounts Receivable, you’ve probably dealt with Accounts Payable every day of your adult life. Think about your electric bill. The electric company gives you have electricity to have in your home all month. You use it and have the advantage of running your fridge and watching TV while the electric company makes the outlay. But you have an agreement with the electric company: you owe them for the cost of that electricity at the end of the month. They credit you the electricity and you pay them back. That, in essence, is an Account Payable: you receive a product or service and then pay back the person or company who provided it to you.

Why Pay Attention to Accounts Payable?

You’re in for a world of hurt if you don’t manage your Accounts Payable. Why? Well, for starters, if you're unclear on who and what your business owes, you can’t really be sure of its financial situation. Compounding that, if you become known for sloppy, haphazard Accounts Payable practices, you’ll build a not-so-good reputation.

 

Mismanaging Accounts Payable can quickly cost you money. Missing payments or making partial payments can lead to late fees, increased interest charges, or even losing a supplier—all bad things. It’s one thing to forget a payment every now and then, but if it becomes a trend, you've got a serious issue on your hands.

 

But when you’re awesome at Accounts Payable, you’ll build trust with the entities that make your business possible. That can lead to better deals or rates or even leniency for that oh-so-rare late payment. And a happy vendor will likely vouch for you however you may need down the road.

How Can I Responsibly Manage My Accounts Payable?

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Subconsciously (or maybe blatantly), all small business owners hate seeing money go out the door. However, there are some things you can do to make it sting a little less:

  • Ask about discounts for early payment or for outstanding payment history. Just like you want your customers to pay you on time and in full, your creditors want the same thing so they may be willing to offer an early payment discount. That’s a good thing to take take advantage of in flush months. Additionally, some creditors will reduce interest rates or offer discounts for a certain number of payments made on time and in full. You’ll never know if you don’t ask.  

  • Set-up automated payments and alerts. Remember those “set it and forget it” infomercials? The same can apply to Accounts Payable (to an extent). Automatic or recurring payments are a great way to ensure that you never forget to send the check or log-in to your bank and allocate the money. And if you’re worried about how that impacts month-to-month cash flow management, set up recurring calendar alert a few days prior to the bill due date and double check that the account it draws from has the available cash. 

  • Negotiate your terms. Many contracts come with standard terms, net 30 or net 60, but that doesn’t mean that your supplier won’t consider other options. After all, contracts are meant to be negotiated! So why would a vendor offer you alternative terms? Well think about it this way: they want to make a sale just as bad as you do. So if 10 additional days is the difference between making a sale and not, many vendors will be willing to negotiate. But be careful: negotiating term could raise suspicion about your cash flow.  

  • Be proactive. If you anticipate that you will have a problem paying a creditor down the line, approach them as early as you can. Discuss the issue with them instead of avoiding them. Not only is this the right thing to do, but it’s also your best way to start the discussion around new terms or a modified payment plan.  

  • Pay down debts with high interest first. Say you have a great month and you have extra cash on hand. Use that opportunity to pay off high interest debt. You will reduce the amount of cash going out the door to interest, which isn’t really helping your bottom line at all. 

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Managing your Accounts Payable efficiently and responsibly is great for your bottom line. Who knew that paying bills could feel so good!

If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it. 

Call Irvine Bookkeeping now for a Free Quote!

#lawbookkeeping #ioltaaccounting #reconciliation #trustaccount #smallbusinessmanagement #budget #administrative #bookkeeping #accounting #digitalmarketing  #irvinebookkeeping #managebookkeeping #accounting #la #ca #california

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What is Accounts Payable and
Why Does it Matter?

Updated: Jul 14

There is some steps business owner can take to minimize the risk of getting your tax returns flagged by the IRS for manual processing — a procedure that can cause long delays in getting your tax refund. Before Finalizing your Tax return, Double – Checking for missing or incorrect is a very important step. If you are a small or medium business, there are 5 bookkeeping Items you need to double-check carefully for missing or Incorrect things to make sure your return is really ready to be filed. 

Item 1: Are ALL Bank and Credit Card Account reconciled?

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First of all, make sure all of your accounts shown in your accounting software match with your bank account and credit card statement, no transactions are leftover. Before starting with this, you must have all of the following documents:

  • Bank Statements 

  • Credit Card Statements

  • Interest Statements

  • Payroll Reports

  • Previous Year’s Tax Return

Nowadays, We regularly use accounting software, such as QuickBooks Desktop or QuickBook online to manage our book more effectively. If everything is properly accounted for, the difference in your reconciliation will show zero.

Item 2: Is payroll grossed up to match what is being reported on the W -2s?

What payroll accounting system are you utilizing? Is it QuickBooks Online Payroll? Or is it a product that can without much of a stretch be incorporated with QuickBooks Online? You will need data from your payroll accounting system to complete the reconciliation. A business owner can get a risk of discrepancies by ensuring employees' wages and taxes reported to both the Internal Revenue Service, IRS, and the Gross Payroll, match.

First and foremost, let’s clarify what is the difference between Gross Pay and Net Pay:

  • Gross Pay (Pre-tax): is the amount of money your employees receive before any Taxes and deductions: overtime, sick and vacation leave, allowances like vehicles and uniforms, taxable group term life insurance,….

  • Net Pay: is the amount of money your employees receive after taxes and deductions have been taken out.

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If you are using payroll accounting software that integrates with your QuickBooks Online account, then payroll amounts are likely being recorded at gross.

If the Gross Pay does not match with what being filled with the IRS, try to figure out by comparing  Forms W-2 wage amounts to individual employees' gross payroll minus their tax deductions.

Item 3: Are all liability accounts (loan balances & payroll liabilities) tied out?

Before finalizing your tax return, Compare your balance sheet and loan statement to make sure liabilities have the correct balances. If there's an account with an incorrect balance, you can pull up the detail of that account to find the entries that caused the error, usually a matter of splitting out interest from principal payments. This check should be performed at least monthly.

On the other hand, payroll liabilities are any type of payment related to payroll that a business owes but has not yet paid. A payroll liability can include wages an employee earned but has not yet received, taxes withheld from employees, and other payroll-related costs.

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Item 4: Are there items sitting in uncategorized expenses on the P&L statement, or uncategorized assets sitting on the balance sheet?

One of the most common problems that I see on the Profit & Loss report in QuickBooks Online are amounts in Uncategorized Income and Uncategorized Expense. As a general rule of thumb, you should avoid using vague categorization whenever possible.

If you don’t know what an expense is, find out what it is before booking it. As a business owner, it behooves you to know where your money is going; this can inform the decisions you make.

Item 5: Are there any outstanding invoices from the previous year still pending payment?

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You have a lot of levers for getting paid, but sometimes none of them work. You may get stuck with an unpaid invoice. If that happens, you should write it off so your accounts reflect the lost income. That’s especially important if you’ve already paid tax on the income that was expected. The act of writing it off allows you to claim the tax back.

Irvine Bookkeeping offers a full range of bookkeeping services and promises that in 2-3 weeks, we clean up a whole book for you to prepare for tax seasons. We believe knowing your company's financial health is the key to maintaining control of your business.

If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it. 

Call Irvine Bookkeeping now for a Free Quote!

#lawbookkeeping #ioltaaccounting #reconciliation #trustaccount #smallbusinessmanagement #budget #administrative #bookkeeping #accounting #digitalmarketing  #irvinebookkeeping #managebookkeeping #accounting #la #ca #california

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