Accounting Archives

New Independent Contractor? Our 7 Essential Habits for Accounting Virgins

August 23, 2019/by Team

When you’re starting as an independent contractor, accounting practices may not be top of mind. But now is the perfect time to develop those good habits that will save you a ton of hassles and heartaches later.

1. Save Receipts

As a business owner, you’re entitled to many tax deductions on expenses, from travel to office supplies to advertising costs. But you can’t claim those deductions (or pass an audit) if you can’t prove they happened. That’s why you need to keep good records.

For converting paper receipts to electronic records, you can choose from a variety of receipt scanning and tracking apps, such as Expensify and Shoeboxed.

2. Keep Business and Personal Expenses Separate

That purchase on your credit card statement from Best Buy: was it for the office printer or your home TV? Doing your books — and your taxes — will be a nightmare if you lose track of what category your purchases should have been put in. Ways to idiot-proof your bookkeeping entries include:
• A separate bank account for the business
• A separate credit card for the business
• Accounting software that automatically codes entries

3. Back-Up Financial Records

What would happen to your business if your computer died or your office burned down? Keep copies of everything (both digital and paper) in a separate location. Many entrepreneurs are moving to cloud-based digital storage, which allows remote access and top-of-the-line security without the need to buy a lot of expensive hardware and software.

You may not require much in the way of a bookkeeping system when you’re starting, but you will as your business expands. Choose software that can scale up with additional capabilities as necessary — and save yourself having to make major changes later.

4. Save for Setbacks

Don’t plow all your profits back into the business. Set aside a percentage of that cash as a hedge against the unexpected events that could ruin you: the illness that prevents you from working, natural disasters, economic downturn, and so on. There are also the expected large expenses to save for, such as inventory stocking and tax payments.

5. Pay Estimated Taxes

Since you’re not working for an employer who takes payroll taxes out of every paycheck, you’re responsible for making your own periodic income tax payments. Estimated taxes are divided up into four payments, one due every quarter. This is easier on the wallet than making one huge payment in April when you file your tax return (however, you can make one annual payment if you’re willing to pay a small penalty).

Estimated taxes are filed with IRS Form 1040-ES. Learn how to estimate the payment amount and how to make payments here.

6. Hire the Expertise You Lack

Not sure what business laws or tax regulations you must follow? Clueless about bookkeeping formulas? Rather than waste your own time and energy trying to figure it out, it may be more cost-effective to outsource those tasks.

At Xendoo, we specialize in accounting and bookkeeping for small businesses. An affordable monthly fee puts decades of expertise and industry-leading, cloud-based software at your fingertips. While we do the numbers, you can get back to doing what you do best.

Understanding Your Profit and Loss Statement

June 21, 2019/in Accounting /by Team

Every month you receive a P&L statement from Xendoo. In a nutshell, it tells you whether your business made a profit or a loss — for the month as well as the year to date.

It can do more than that, though, if you know what the numbers mean. Here’s a quick guide.

Revenue on a profit and loss statement

The money you received from customers who bought your products or services. This section probably itemizes sources of those revenues, so you can see which areas are bringing in the biggest returns.

It shows the total sales amount including any sales tax collected. When you remit the tax to the state, that amount will be listed as a debit entry to be subtracted from total revenue. (All debit entries are shown in parentheses.)

This section will also account for any merchandise that was returned to you by customers, as a negative entry. Since the original sale is listed in this section, the return has to be there also, so that it balances out to zero.

Cost of Sales

These are the expenses directly related to the products or services you sell, including your purchase costs, labor, storage, and delivery.

The line called “Cost of Goods Sold” can either be what you paid for merchandise that you resell or raw materials that you make into products for sale, as well as manufacturing labor costs.

Gross Profit

Revenue – Cost of Sales = Gross Profit. This line is immediately under the Cost of Sales section. If the number is in parentheses, you made a loss instead of a profit.

Be sure to look at the year to date column as well as this month’s column. There’s no need to panic over one atypical month if the year to date figures are in line with your expectations.

Other Income and Expense

Here is where you’ll find everything not directly involved in making and/or selling your product.

Office and equipment-related expenses such as utilities, leasing, and maintenance
Employee-related expenses such as salaries, insurance, and business travel
Fees such as licenses, bank charges, and merchant fees
Taxes: real estate and payroll
Costs of advertising, legal or other professional services

Net Income

Gross Profit – Other Income and Expense = Net Income. This line is immediately under the Other Income and Expense section. Net Income is your “bottom line”, which reveals whether your business is operating in the black or the red. Note, it does not include your business income tax, which will be calculated at the time you fill out your return.

Because we know how important these numbers are to your business decision-making, Xendoo guarantees delivery of our clients’ Profit and Loss statement by the fifth business day of every month. This allows you to quickly identify — and react to — both trouble spots and growth opportunities. It’s just one of the ways we help keep your business growing strong.

New Jersey Resale Certificate — A Guide for Buyers and Sellers

May 20, 2019/in Accounting /by Team

A state resale certificate exempts you from paying sales tax on items or services you buy in that state for the purpose of reselling, renting, or leasing them out. Here’s an overview of the regulations you’ll need to follow in the state of New Jersey.

Purchases that qualify for the sales tax exemption include any products that will be resold in their present form, as well as physical components of products made or repaired by your business.

Purchases that DON’T qualify include:

Office supplies
Tools and equipment used by your business
Materials and services used for capital improvements to your business
Anything for your personal use

For example, if you make beaded jewelry for your online store, you don’t have to pay sales tax on purchases of beads, but you do have to pay it on the needles you use to string the beads.

When making your purchase, you’ll present the seller with one of the certificates listed below, which you’ve printed out and filled in completely:

Form ST-3 Resale Certificate for in-state resellers
Form ST-3NR Resale Certificate for out-of-state resellers

Both of these forms require you to fill in a tax identification number — which means you must have applied for and received a permit to collect sales tax (and must then file periodic sales tax returns). If you’re not registered to collect sales tax in New Jersey, you can use either your tax registration number from another state(s) or your federal employer identification number.

Learn more about the New Jersey resale certificate in New Jersey’s Bulletin S&U-6.

Be aware that sellers are not required to give you the tax exemption, even if you present a valid resale certificate. Target, for one, is well-known for refusing to accept resale certificates. Also, they are required to check that your certificate is legit, and can suffer major penalties if it’s not — so don’t bother trying to fake it.

You may be wondering what happens if you never sell the items you bought tax-free. If they are determined to be unsellable, you can remit use tax rather than the sales tax on them to avoid the penalty.

Sales Tax Exemption for Sellers

As stated above, you’re not required to give a sales tax exemption to anyone who asks for it, even if they have a resale certificate. Be aware that if you do, the responsibility lies with you to confirm the validity of the certificate.

If it turns out to be invalid, you could be on the hook for paying the sales tax, plus assorted fines and penalties.

Make sure that the certificate is completely filled out, including tax registration number, date, and signature. If you accidentally accepted one that is incomplete or incorrect, you have 90 days to obtain a revised one from the buyer.

The State of Jersey offers a quick link to check the authenticity of the resale certificate.

The New Jersey Division of Taxation requires that you keep the certificate in your files for 4 years from the date of the transaction so that it can be inspected if necessary.

Of course, to accept a resale certificate, your own business must be registered to collect sales tax in New Jersey.

Have more questions about sales tax exemptions, registrations, collections, or filings in the state of New Jersey? Leave it to your Xendoo tax professional to keep all that part of your business running smoothly, so you can spend more time doing what you love.

7 Benefits of Inventory Accounting

May 8, 2019/in Accounting /by Team

If your business sells, resells, or makes new products from purchased stock, then your inventory is probably your biggest asset. The right accounting tools can help you make sure that inventory maintains its value, as well as guide business decisions for maximum success.

Types of Inventory

First, determine what type of inventory you work with.

Items for Reselling

The stock of a retail store, or the retail component of a service business such as a hair salon. (Drop shipped products don’t count if you never bought them from the supplier.)

Items for Installing

Products sold by a service business as an essential part of the job, for example, a computer repair company that sells spare parts.

Items for Manufacturing

Materials you make into products for sale, for example, fabric, beads, thread, etc. for making wedding gowns. For accounting purposes, they will be assigned to one of three categories:

• Raw materials
• Work in progress
• Finished goods

Basics of Inventory Accounting

To keep tight control of your inventory, set the right prices, properly insure the stock and do your taxes, you’ll need to track the number of variables. Your accounting software should be able to show you:

• Cost of goods
• Associated costs including storage, shipping, and losses due to damage or age
• Stock on hand
• Selling price
• Revenue
• Profit (or loss)
• Items sold
• Sales patterns by item and season

You must also choose an inventory valuation method for your year-end statement, which will affect both your profits and tax liability. The most common ones are:

LIFO (Last In, First Out): Assumes you sell your most recently acquired — therefore most expensive — items first, while leaving older/lower priced stock on the shelf.

• Advantage: Increases the cost of goods sold and lowers net income, reducing taxes.
• Disadvantage: May does not correspond to the actual flow of goods or replacement costs.

FIFO (First In, First Out): Assumes you have perishable or quickly outdated items, so you need to sell the oldest goods first. Also, if selling prices rise, this method will give you a lower cost of goods sold.

• Advantage: Makes bottom line look better to lenders and investors.
• Disadvantage: Higher profit results in higher taxes.

AVCO (Weighted Average Cost): Bases report on the average product cost and average selling price for the entire year.

• Advantage: Simpler to do, more accurately represents replacement costs.
• Disadvantage: Inaccurate when prices fluctuate severely up or down.

Benefits of Inventory Management

Now we get to the good stuff: how your accounting system can save money and help you make money, too.

1. Avoid cash flow problems. With stock levels properly tracked, you’ll never tie up too much cash in unneeded inventory. Use that cash to pay other expenses or improve your business.

2. Maximize sales. Know in advance when you’re running short of an item, so you’ll never have to turn customers away.

3. Reduce storage costs. Know which items are slow-selling, so you reorder less often or not at all.

4. Maximize write-offs. Know exactly how much you’re losing to damage, theft, and product expiration.

5. Get bulk discounts. Know what’s selling fast, so you can place larger orders at a lower cost per unit.

6. Get better marketing results. Use seasonal sales trends to build promotions.

7. Optimize profit margins. Fully tracked costs let you see how much you’re making and where adjustments could be made.

In short, the better your inventory management system, the more you’ll be empowered to take your business to the next level. If you have any questions about inventory accounting or valuation, please give us a call.

How to Pay Yourself When You’re the SMB Owner

January 24, 2019/in Accounting /by Team

It’s all too easy to dip into the company’s bank account as and when you need to. But there are many good reasons to put yourself on a fixed salary, including simplifying your tax return, protecting yourself from the company’s debt liability…

Here’s how to figure out how much you should pay yourself.

Give Yourself “Reasonable Compensation”

Taking out big chunks of money will raise eyebrows at the IRS. On the other hand, don’t go so low that you cause yourself financial and emotional stress.

Reasonable compensation is how much you would have to pay someone else to do your job. The answer to that question depends on your industry, location and other factors. An hour or so of internet research or talking to your industry peers can help you hone in on:
• What recruitment ads are offering for similar positions
• If your pay is commensurate with your duties and responsibilities
• If your pay seems reasonable compared with your employee’s wages
• If your pay seems reasonable for the number of hours you work

Take It Out of Profits, Not Revenues

In other words, deduct all your expenses, such as supplies, taxes, payroll and overhead, from the amount of money coming in first. Whatever’s leftover is what you can draw your salary from.

Good accounting software will do most of the work in figuring all that out.

Don’t Take It If You Can’t Afford It

The company’s current finances may simply not be able to support another salary (yours). For example:
• Your employees haven’t been paid: Giving yourself wages but not them will ruin morale
• The company has a large amount of debt: Likewise, creditors will be unhappy if they don’t get paid first

Check the Legalities

The legal structure of your business might dictate how much — and when — you can pay yourself. For example:
• Sole proprietors usually have no restrictions, because they are not accountable to shareholders
• Corporations usually have the business owner on the payroll, like any other employee

Decide on a Pay Method

How you pay yourself can have a significant effect on your tax liability. There’s so much variation in tax laws and business structures there’s no one right way for every business owner. You might want to consider:

• Straight salary: Simplest but not always the most tax-efficient
• Salary plus dividends: If you own stock or shares in the company, take as much as you can in dividend payments since they’re usually taxed less than salary
• Stock or stock options: also very tax-efficient
• Salary plus annual bonus: If structured right, it can save on taxes
• Business agreement to defer payment: A good option if money is tight, however, it will be registered as a company liability

Need help deciding if, how much, and how to pay yourself? Xendoo’s accounting experts provide easy-to-understand profit & loss statements, tax advice, and tips on improving profitability so you can pay yourself the salary you deserve.

How to Choose a Cloud Accounting Provider

October 31, 2018/in Accounting /by Team

Putting your accounting in the cloud offers huge advantages, including speed, accessibility from anywhere, and reduced on-site storage needs. But first, make very sure that your provider meets your standards and requirements.

What a Cloud Provider Provides

You’re probably familiar with cloud storage for files; it simply means that this data is stored on a server (your company’s or one you contract with) and is accessible from any computer or other device with an internet connection. A cloud provider goes one step further and lets you run applications as well as storing files. It eliminates the need for keeping software on your own machine.

Must-Have #1: Digital Robustness

It’s critical to keep your financial data safe and secure. The cloud provider you choose should be able to demonstrate:

• Its own data center – rather than outsourcing to some other company

• Data encryption – to make data useless to hackers

• Secured access

• Good uptime – ideally 99.95%, or less than 1 hour of downtime per year

• Backup systems

• Disaster recovery plan

Must-Have #2: Financial Robustness

You want your provider to be around for the long haul, giving you uninterrupted access and support for your data.

Must-Have #3: Universal Compatibility

Your cloud service provider should work with a variety of devices, operating systems, and applications that might be used by various members of your team to access the files and software.

• Apple iOS and Android mobile devices

• Windows PC and Apple Mac desktop and laptop computers

• 3rd-party applications (not just those the provider offers)

Must-Have #4: Data Exportability

Someday, you may want to change cloud providers. You should be able to export your data from their system whenever you want, in a file format that can be used by other software. (This is why you don’t want to get tied into one provider’s apps.)

Must-Have #5: Tech Support

You want to work with a provider that responds quickly and expertly to any problems that might arise. Read through the company’s online community forum to get an idea of how they value and interact with their customers.

Must-Have #6: Scalability

As your company grows, the accounting infrastructure must be able to handle your increased need for processing power and data storage. What’s more, your provider should schedule updates and upgrades with you in advance, so that you’re not hit with an unexpected downtime at the worst possible moment.

Must-Have #7: Clear Billing Plan

The pricing structure should be detailed enough that you won’t be stuck with any surprise charges. For example, will you be using your own internet provider which you’re already paying for, or will there be a dedicated data connection to the cloud that costs extra? Also, look beyond the lowball sign-up cost, which the provider may make up for down the road with steep increases after the initial period.

Enjoy Your Cloud-Based Accounting

Xendoo clients get access to Xero Accounting software, a best in class cloud accounting platform. Take advantage of the convenience and cost savings of accounting in the cloud!

8 Ways DIY Accounting Costs More Than It Saves

August 9, 2018/in Accounting /by Team

A business owner trying to do diy accounting

No matter how much they hate it, small business owners tend to do their own accounting. They’ll tell you they’d love to hire a bookkeeper, but they just can’t justify the expense.

What they don’t take into consideration is all the ways a professional CPA can cut business expenses, take advantage of savings opportunities, and avoid costly mistakes. Here’s what having a good accountant can do for you:

1. Find more tax breaks.

A good business accountant will claim expenses you may not have known were deductible. They can also advise on the timing of major purchases to take full advantage of tax credits and depreciation.

2. File taxes on time.

Late returns and other compliance paperwork will incur penalties and interest.

3. File accurate taxes.

Under-reporting how much you owe could lead to big trouble with the IRS, as well as state and local authorities if you collect sales tax.

4. Send invoices out on time.

An accountant will help you avoid a cash flow crisis by keeping up to speed with invoicing.

5. Track late payments.

Well-kept books should show you at a glance what you’re owed and when it’s due. No more need to spend time and money on collections efforts.

6. Eliminate data entry errors.

For the DIY bookkeeper, figuring out and fixing the mistake could take hours — which the small business owner could spend more profitably elsewhere.

7. Provide information for smart business decisions.

You should be able to spot right away when there’s an issue with cash flow, inventory, or profit margin, and take early corrective action. On the flip side, your accountant can point out opportunities for growth or reducing unnecessary costs.

8. Free you up to add value to your business.

Is it a smart use of your time to be doing data entry, tracking invoices/payments, reconciling bank accounts and control accounts, processing payroll, managing inventory, preparing tax documents, and so on?

“But I still can’t afford an accountant”

The benefits may be clear, but most owner-managers just don’t have the budget to add a full-time professional accountant. As small business specialists, we understand your position. That’s why we offer affordable monthly plans that cost less than half of what a traditional accountant typically charges (in a couple of hours!).

How to make the best use of your accountant

When you hire a professional consultant, you want to take advantage of the team’s expertise in showing you how to save money and make your business more profitable. You’d rather not have them spend all their time on routine tasks.

That’s why Xendoo uses state-of-the-art software that automates many such tasks, from entering sales transactions directly from your bank into your books to coding each entry as it happens so there’s no last-minute rush at tax time. Your accounting team is free to provide you with valuable advice, and you’re free to focus on your core business. Not to mention getting a good night’s sleep.

7 Steps for Retailers to Reduce Inventory Shrinkage

July 1, 2017/in Accounting /by Team

Inevitably, somewhere between the manufacturer and the cash register, some of your merchandise disappears. Every retailer has this problem; in fact, it adds up to more than $42 billion in annual losses nationwide. The three biggest causes of shrinkage are administrative errors, employee theft, and customer theft. Here’s how to counteract them.

1. Use a good inventory management system.

Wherever human beings are doing the counting, organizing, and recording, errors are sure to happen. Choose software that:

Organizes product and vendor information
Integrates with your POS system so that inventory data is automatically updated after every transaction
Generates accurate purchase orders

2. Tighten up your inventory receiving process.

To minimize mistakes:

Cross-check against the PO at the time of delivery
Call the vendor within 24 hours to resolve inconsistencies
Tag and label merchandise immediately

3. Record sales consistently.

Any currently available POS system will do this automatically.

4. Take physical inventory.

It’s the only way to reveal discrepancies between what your inventory software says you have and what you have. Cross-reference the manual counts against software records to see where shortages are occurring, for example with a particular cash register or employee, or during the same shift and day every week.

5. Train employees in loss prevention.

Letting everyone know that you have a strong plan to stop theft can deter both employees and customers.

6. Improve pre-employment screening.

The reality of retail is that employee turnover is high and company loyalty usually low. Besides, employees have less supervision and easy access to your valuables. Do your due diligence in hiring people with no history of dishonesty, including nationwide criminal background checks and verification that resumes are complete and truthful.

7. Install a security system.

Large, visible cameras act as warnings to thieves to pick an easier target. They also help catch and convict criminals after thefts occur.

Inventory shrinkage is a challenge that will never go away. And that means your efforts towards loss prevention can never stop either. Success lies in ongoing processes and continuous attention to keep your merchandise right where it belongs.