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Tag Archive for: Accounting

LLC vs. S corp: Which is right for your business and taxes? 

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llc vs s corp

One of the most important decisions for business owners is which type of business entity to form. Your business structure impacts your tax savings, accounting practices, and how you pay yourself. 

Examples of business structures include: 

  • Sole proprietorship
  • Partnership
  • Limited liability company (LLC)
  • S corporation (S corp)
  • C corporation (C corp)

Businesses often weigh the pros and cons of forming an LLC vs. S corp. Xendoo does online accounting, bookkeeping, and taxes for businesses, so it’s a question we answer frequently. 

In this article, we’ll explore the differences between an LLC vs. S corp, and help you decide which structure is best for your business.

Why your business structure matters

Choosing the right business entity is crucial for several reasons, including:

  • Liability protection: Some business types provide legal protection for your personal assets, while others don’t. For example, sole proprietorships are unincorporated businesses without personal liability protection. A sole proprietor is responsible for the business’s debts and liabilities.
  • How you pay yourself: With some LLCs, you can pay yourself by withdrawing funds from an owner’s draw. In others (like corporations), you’ll need to pay yourself a salary.
  • Tax classification: Your structure impacts how you file taxes, the amount of taxes you owe, and which tax deductions you can claim.
  • Ability to raise capital: Some entity types have many options for raising capital, while others are very limited.

What’s the difference between LLC vs S corp?

Overall, LLCs have a more flexible structure, while S corps can save money on taxes in the long run.

The biggest differences between LLCs and S corps are ownership, taxes, and management structure. Here’s a breakdown of each.

  LLC S corp
Ownership No restrictions on the number of members or their citizenship status. Must be 18 years or older. Limited to 100 shareholders who must be US citizens or resident aliens.
Taxes Taxed as a pass-through entity. Subject to self-employment taxes. Taxed as a pass-through entity. Saves on payroll taxes by paying owners a salary and distributions.
Management structure May choose between member-managed or manager-managed Managed by shareholders and officers 
Reporting Most states require filing annual reports along with an annual reporting fee or tax More complex reporting requirements than LLCs. Must file yearly reports and documentation with the state

Below, we’ll look at LLCs and S corps in more detail to help you decide which is the best option for your company. 

What’s an LLC? 

A limited liability company (LLC) combines the liability protection of a corporation with the tax benefits and flexibility of a partnership. 

The key points to know about operating as an LLC are:

  • Limited liability companies are separate legal entities from their owners (called members). This limited liability protects the members’ personal assets from the company’s debts.
  • LLCs have a flexible tax structure, with the option to pay taxes as a corporation or as a pass-through entity. 
  • There are no restrictions on the number of LLC owners. 
  • Members usually pay themselves through distributions, following the guidelines set in their operating agreement.
  • The specific requirements to form an LLC can vary depending on the state where your form your LLC.

Requirements for an LLC generally include:

  • Choosing a unique business name.
  • Naming a registered agent, who’ll accept legal documents on behalf of the LLC.
  • Filing articles of organization with information such as the LLC’s name, purpose, address, duration, management structure, and members. 
  • Paying taxes and fees based on the state requirements.
Advantages of LLCs Disadvantages of LLCs
Protects the owner’s personal assets Subject to self-employment tax, meaning a possible higher tax bill
It’s a pass-through entity, so you include business income on your personal tax return. This way you avoid double taxation (where the corporation and shareholders pay tax on the same income). Fewer options for raising capital compared to corporations
Offer greater flexibility in management and ownership structure The multi-member structure can become complex

How LLC taxes work

LLCs don’t pay corporate income tax. Instead, they pass through their tax liability to the business owners. In an LLC with multiple owners, each owner includes their share of the company profits and losses on their personal income tax returns.

However, LLCs have the option to choose a corporate taxation structure with the IRS. Choosing a corporate tax structure can be an advantage for high-income-earning LLC members. 

In an LLC with a corporate tax structure, the LLC would file a corporate income tax return and pay the corporate tax rate instead of passing the liability on to the members. 

LLC ownership

LLCs have a very flexible ownership structure, with the only requirement being that members need to be at least 18 years old.

An LLC can have one or multiple members, with no maximum number of members. Also, owners can be individuals, corporations, other LLCs, or foreign entities.

LLC management structure

An LLC provides its members with more flexibility than an S corp. There are two types of LLC management structures: member-managed and manager-managed. 

In a member-managed LLC:

  • Each member has the authority to make decisions on behalf of the LLC.
  • Each member has the responsibility to play an active role in the management and operation of the business.

In a manager-managed LLC:

  • One or more individuals act as the LLC manager. 
  • Only the manager has the authority to manage the company.
  • The manager can be a member or a non-member. 

Unlike in a member-managed LLC, members of a manager-managed LLC can’t make decisions on behalf of the company. Members also can’t interfere with the LLC manager’s operational decisions.

Most LLCs include their management structure with their articles of organization.

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What’s an S corp? 

An S corporation is a corporation that chooses to pass its tax liabilities and tax credits to its shareholders for federal tax purposes. 

An S corp is a tax classification. It offers the same personal liability protection as a traditional corporation without a corporate income tax.

Most S corps start as traditional corporations (called C corps). To avoid double taxation, or for other reasons, corporations can file an S corporation election with the IRS. However, not all corporations meet the requirements for an S corp status.

Advantages of S corps Disadvantages of S corps
Provides limited liability protection for shareholders Ownership restrictions, such as 100 members max and only one class of stock
As a pass-through entity, it’s not subject to corporate income tax Must pay a salary to shareholders
Can save on employment taxes by paying shareholders both a salary and dividends Complex tax filing requirements

How S corp taxes work

S corps pay taxes as pass-through entities. Instead of paying the corporate tax rate, shareholders report their share of income and losses on their personal income tax returns.

S corps need to pay their shareholders a reasonable salary and withhold employment taxes like Social Security and Medicare (roughly 35% to 40% of the shareholder’s total take). They can also pay out dividends to shareholders from the company’s remaining profits.

This distribution would not be subject to employment taxes which would equate to a 15.3% tax savings. It can help companies save money on income taxes in the long run while avoiding double taxation.

S corp ownership

To qualify for S corp status, the corporation must meet the following requirements: 

  • Be a domestic corporation
  • Have only allowable shareholders (individuals, certain trusts, and estates)
  • No more than 100 shareholders
  • Only one class of stock
  • Not be an ineligible corporation (certain financial institutions, insurance companies, and domestic international sales corporations)

S corp management structure

S corps have specific requirements regarding their management structure. An S corp must have shareholders and officers.

  • Shareholders: Owners of the company 
  • Officers: Manage the day-to-day operations of the company

Shareholders can play a dual role by choosing a shareholder-officer position, instead of hiring officers.

Some companies also have a board of directors, but it’s not mandatory. If the company has a board of directors, the shareholders typically elect them. 

S corps must also follow certain corporate formalities, including holding annual meetings and maintaining proper records of company activities. Regulations vary by state, but they usually include recording meeting minutes. 

How to choose between an LLC or S corp 

Choosing between an LLC and an S corp depends on various factors, including your business goals, structure, and tax considerations. Below are some guidelines to help determine the right one for you.

When to choose an LLC

Choose an LLC when you want:

  • A more flexible and less formal business structure
  • Fewer administrative requirements
  • Greater flexibility in management, ownership, and profit distribution
  • Flexible payroll requirements

Small businesses and startups that need operational flexibility would operate best as an LLC.

When to choose an S corp

Choose an S corp when you want:

  • A corporate legal business structure without being subject to double taxation
  • Potential tax advantages, particularly if you’re a business with substantial profits
  • Consistent income and benefits for owners while enjoying the tax advantages of pass-through taxation
  • To attract outside investors for rapid growth

Growing, high-income earning companies can see potential tax advantages from choosing an S corp status.

Choose the best entity type for your business

If you’re unsure which entity type to choose, you can use a tax service like Xendoo.

Our in-house CPAs can help save money on taxes, outsource your bookkeeping, or get personalized advice like choosing between LLC vs. S corp.

FAQs

Which is better for taxes: LLC or S corp? 

The answer depends on your specific circumstances. However, an S corp can provide potential tax savings for businesses with higher profits because they allow for structured tax planning and savings.

LLCs may be more advantageous for businesses with lower profits or companies that need flexible operational and payroll requirements.

Why choose an S corp over an LLC?

An S corp can offer tax savings by potentially reducing self-employment taxes. It can also be a more appealing structure for businesses with plans for significant growth or attracting outside investors.

Do S corps pay self-employment tax?

No, an S-corp does not pay self-employment taxes. Instead, owners receive a reasonable salary and have payroll taxes withheld from their paychecks.

They also receive distributions from the company’s profits, but they aren’t subject to tax.

Can you switch from an LLC to an S corp?

Yes, it’s possible to switch from an LLC to an S corporation by filing the required forms with the IRS. You also need to qualify as an eligible entity for S corporation status and follow the specific steps the IRS outlines.

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

What happens if you get audited and don’t have receipts?

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what happens if you get audited and don't have receipts

Most small businesses have a low probability of going through an IRS audit, but it’s possible. 

What happens if you get audited and don’t have receipts to back your expenses? It’s a common question and concern for many business owners. 

The best way to avoid headaches during an IRS audit is to keep accurate business records and bookkeeping year-round, and that includes tracking receipts. 

Receipts are a paper trail for your business transactions and taxes. Without them, it’s harder to prove your tax deductions and other records are accurate. However, forgetting or misplacing receipts happens, especially when you’re busy running a business.

The IRS regularly deals with missing receipts, so there are guidelines for what businesses can do if they don’t have receipts. 

Also, Xendoo’s bookkeepers and CPAs have years of experience managing business record keeping. Learn everything you need to know about IRS audits and receipts below. 

Table of contents

Why do businesses need receipts?

Receipts are records and proof of payment for the income and expenses your small business claims on tax returns. Without receipts, you may not be able to prove that a business transaction took place.

Businesses should keep receipts for record-keeping, but also to claim tax deductions and credits. 

For example, if you’re traveling away from home for a business trip, you could deduct travel expenses that save you money on taxes.

However, you’ll need to prove that the travel was for business purposes and keep receipts for items like: 

  • Airfare
  • Hotels
  • Parking fees
  • Car rental or ride-shares
  • Other travel expenses 

Receipts businesses should keep

Receipts aren’t the only records that businesses should keep, but they help you track your income and expenses. 

Companies track a lot of receipts. Some examples of costs that you’ll need receipts for include: 

  • Office supplies and equipment 
  • Inventory purchases
  • Advertising and professional services
  • Company training and employee education
  • Travel expenses

Since this isn’t an exhaustive list, it’s best to track all your business receipts and update your records regularly. To make the process simpler, many small business owners use business expense tracking and receipt apps. 

A bookkeeping service can also advise you on which records and receipts to track (and in some cases, do it for you). 

What happens if you get audited and don’t have receipts

If you’re audited and don’t have receipts, you have several options. Because the IRS regularly deals with missing receipts, there are standard steps businesses can follow.

In most cases, you’ll be able to track down receipts or provide other documents, which we’ll outline later, to prove an expense. The worst-case scenario is that the IRS may remove some business tax credits and deductions you claim. 

Audits aren’t as big a deal as movies and the media make them out to be, especially if you keep organized business records. There are many reasons the IRS might audit a business, but most happen due to random selection or tax errors.

If the IRS audits you, you’ll receive a notification letter. From there, you’ll communicate with your auditor and provide the documents they ask for.

The IRS doesn’t always share what triggered an audit, but these are some red flags: 

  • Over or under-reported income 
  • Suspiciously high tax credit and deduction claims
  • Rounded numbers ($2,000) for expenses instead of exact amounts ($1,930) 
  • Other mistakes or inaccurate data

Although tax professionals and CPAs are familiar with tax laws and can help you navigate an audit, they focus on avoiding audits first. Business tax services prepare and file taxes for you, so they’ll catch inaccuracies and mistakes before you send tax returns to the IRS.

What to do when you don’t have receipts

If you don’t have receipts and you’re worried about an IRS audit, you have two options.

  1. Hire a catch up bookkeeping service that also has tax CPAs. They’ll get your records caught up, file your taxes accurately, and help you avoid an audit in the future. 
  2. Gather all the receipts and tax documents yourself. You’ll need the time to dig through and organize your business records.

If you don’t do either of the above options, you’ll likely take the loss of deductions or credits. Depending on your situation, you may need to pay IRS fees.

Let’s take a closer look at the steps you can take when you don’t have receipts. 

1. The Cohan rule

Missing receipts are so common that since the 1930s, there has been a legal rule that outlines options for taxpayers that don’t have them. It’s called the Cohan rule, and in some cases, you can use it to claim deductions if you’re missing receipts. 

In a nutshell, the Cohan rule says that:

  • You can claim business expenses without receipts if they’re reasonable and credible.
  • The IRS may not allow you to claim the full amount. Instead, they’ll calculate the minimum standard amount for expenses.

The Cohan rule has helped many small business owners prove their business expenses when they’re missing receipts. However, the IRS can reject your deductions even if you follow the Cohan rule. 

For example, if your deductions include certain expenses like entertainment, you can’t claim the Cohan rule. You’ll also need to explain and document the:

  • Exact purchase amount for products or services
  • Reason for the purchase
  • Dates and locations when you purchased it
  • Other relevant transaction details

2. See if vendors will provide invoices and receipts

To provide the IRS with documentation, you can reach out to vendors to request duplicate receipts.

Since most vendors use online invoicing and billing systems, they’ll have copies of your records.

Keep in mind that some vendors might charge a fee for their time to retrieve past invoices, receipts, and other statements.

3. Find checks, credit card, or bank account statements

If you’re unsure where you made a purchase or can’t contact them to provide copies, search through old checks, bank, and credit card statements.

Going through these documents can tell you:

  • How much you spent
  • When you made a purchase
  • What company the transaction is from

You can use this information to reach out to vendors and ask them for receipts or use it to prove your expense is legitimate. Getting copies of the receipts is ideal though, since it will show exactly what you spent money on to count as a tax-deductible expense. 

4. Review your calendar and emails

Reviewing your calendar and email will help you narrow down your search for receipts.

Oftentimes, when you make a purchase, companies send payment confirmation and a copy of your receipt to your email. If you know the name of the company, purchase date, or other details, you may find it with a quick search of your inbox. 

If you don’t, looking through your calendar could reveal where you were on certain days. It’s especially helpful to find when you traveled for business to claim those travel expenses. 

Although this method helps you find transaction details, the IRS doesn’t accept calendars or emails as proof of business expenses.

5. Look at location data and maps on your phone

A similar method to search for transaction details is to use location data on your phone. Your phone stores a lot of information about your activity throughout your day. 

You can search through your Google search or social media history to find the name of vendors and locations you visited. 

Again, it will help you find where you made a purchase so you can track down receipts. However, the IRS doesn’t accept location data as proof of your deduction eligibility.

How bookkeeping and tax services help

Although it’s best to keep records and receipts, you can claim reasonable business expenses without receipts. If you don’t have receipts, you may not be able to claim the full amount of deductions unless you can prove your claims are legitimate. Missing receipts could mean you have inaccurate records and tax returns, which could trigger an audit. 

Businesses can avoid audits with accurate and organized bookkeeping year-round. However, there are many records that businesses need to keep, including receipts, financial statements, payroll, and much more. It’s understandable if you lose a few receipts or fall behind—many businesses do. 

Professional tax services like Xendoo make bookkeeping easy for businesses. If your business needs catch up bookkeeping, accounting, tax services, or a combination, chat with a Xendoo accountant. During the chat, we’ll get to know your business and its bookkeeping and accounting needs. If you aren’t sure which services you need yet, we’ll help you figure that out too.  

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

Small Business Owner’s Equity Guide

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If you’re a small business owner, you know that keeping track of all the moving parts can be challenging. Most small business owners keep track of their profit and loss statement, but the owner’s equity is equally important (and often overlooked).  

In this guide, we will explain what owner’s equity is and how to calculate it. We will also give tips on how to grow your equity and protect it from potential risks. 

What Is Owner’s Equity?

Owner’s equity is the portion of a business’s assets that the owner or shareholders possess. This applies to you, regardless of if your business is a sole proprietorship, partnership, or corporation.

Also, owner’s equity can be considered the residual value of a company’s assets after liabilities are paid. For example, if a business has assets of $100,000 and liabilities of $60,000, the owner’s equity will be $40,000.

Why Do Businesses Record Owner’s Equity?

No one wants to think about the end of their business which they have spent so much time and effort building. Yet, it is important to consider. Owner’s equity will give you some insight into the outcome of company liquidation. 

It represents the amount of money that would be left over for owners if the company was liquidated. If you sell your business, it will also be taken into consideration.

For corporations, owner’s equity is also a critical factor in determining a company’s stock price. The higher the equity, the more valuable the company is considered to be. 

Additionally, it can increase through profitability and investment. It can decrease through operating losses or share repurchases.

How you record equity can depend on the type of company structure. 

Sole Proprietorship

In a sole proprietorship, the owner and the company are one and the same. The owner of a sole proprietorship has complete control over the equity of the business. However, this also means that the owner is personally responsible for any debts or losses incurred. 

In a sole proprietorship, the owner’s equity is equal to the assets of the business minus any liabilities. 

Despite the overlap between personal and business for a sole proprietorship, it’s still best practice to maintain separate accounts.

Corporation

By contrast, a corporation is a separate legal entity from its owners. The owners of a corporation are known as shareholders or stockholders.

In a corporation, the shareholders own the equity of the company. This means that they have some control over how the assets of the business are used, but they are not personally liable for the debts of the business. 

But it also means, in the case of bankruptcy, that the owner’s equity is first used to pay off any outstanding liabilities of the company before being distributed to shareholders.

Ultimately, when it comes to ownership structure, it is up to each individual business to decide which type of structure is right for them.

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What Do You Include in Owner’s Equity?

Owner’s equity is the portion of a business’s assets that are held by the business and not distributed to the owners. This can include various types of stock and retained earnings. 

The balance in the owner’s equity account will increase when the company makes a profit and decrease when the company sustains a loss. It can also be increased through investment in the business. 

When calculating owner’s equity, it is important to only include those assets that are owned by the business owner(s), whether they are shareholders or a sole proprietor. This means that any liabilities or expenses must be deducted from the total value of the assets. The result is the owner’s equity. 

It can be a positive or negative number, depending on whether the value of the assets exceeds the amount of the liabilities.

Also, it may include the following: 

  • Common Stock
  • Preferred Stock
  • Prior Years’ Retained Earnings 
  • Current Year Earnings
  • Less Current Year Distributions and Dividends

Examples of Owner’s Equity

There are several different types of owner’s equity, including common stock, preferred stock, retained earnings, and treasury stock. 

Common Stock

Common stock is the most basic type of ownership interest in a corporation and represents the residual claim on a company’s assets after all debts and liabilities have been paid. Preferred stock gives holders priority over common shareholders in terms of dividend payments and asset distribution in the event of liquidation. 

Retained Earnings

Retained earnings are typically profits that a company has reinvested back into the business instead of paying out as dividends. 

Treasury Stock

Treasury stock is stock that has been repurchased by the company and is not currently outstanding.

How to Calculate Owner’s Equity

If you own a company, it’s important to understand how to calculate your owner’s equity. This figure represents your personal investment in the business, and it can be a helpful tool for tracking the health of your company over time. 

To calculate your owner’s equity, simply subtract your total liabilities from your total assets. This will give you your equity stake in the business. Keep in mind that your equity can increase or decrease depending on your financial performance. If you’re looking to attract investors, strong equity can be a valuable selling point. 

  • Owner’s equity = Company’s assets – Company’s liabilities – Less funds withdrawn by owner(s)

By understanding how to calculate this figure, you can gain insights into the financial health of your business and make more informed decisions about its future.

Where Does Owner’s Equity Appear on the Balance Sheet?

It appears on the balance sheet as a positive number, representing the assets that the owner has put into the business. 

For publicly traded companies, the owner’s equity can be spotted on the balance sheet. Below is an example from a recently filed 10-Q for Caterpillar. In the example, you can see that the shareholders’ (owners’) equity is $15,759 million. This means that the combined investment by shareholders since the company’s inception is $15,759 million.

example of equity

Privately held companies will see the owner’s equity on the balance sheet below the liabilities as well. However, there are usually fewer categories included in the balance sheet of a privately held company.

Business owners could use their equity to pay for business expenses, buy new assets, or reinvest in the business. It can also be used as collateral for loans, to pay dividends to shareholders, or to buy back shares from shareholders. 

How to Increase Owner’s Equity

It can be increased in a number of ways, including reinvesting profits, reducing liabilities, and increasing the value of the assets.

Invest Additional Funds Into the Business

When a business is doing well, it can be tempting to just sit back and enjoy the fruits of your labor. However, if you want to continue to thrive, it’s important to reinvest some of your profits back into the business. 

This will help to increase your equity, which provides a cushion in case of tough times and can also help you finance growth opportunities. There are a number of ways to reinvest in your business, such as hiring new staff, investing in new equipment, or expanding your facilities. 

By taking the time to reinvest in your business, you can help ensure its long-term success.

Reduce Liabilities

It’s important to understand the relationship between liabilities and equity. Simply put, liabilities are what you owe, while equity is what you own. By reducing your liabilities, you increase your equity. 

Reducing liabilities can be accomplished in several ways, such as paying off debt or increasing your savings. Reducing your liabilities has a number of benefits. First, it frees up cash that can be used to grow the business. Second, it improves your credit rating, making it easier to get loans in the future. Finally, it reduces the amount of interest you owe, which can save you money in the long run. So if you’re looking to strengthen your business’s financial position, reducing liabilities is a good place to start.

Minimize Expenses

As a business owner, it’s important to keep an eye on your expenses. Not only will this help to improve your bottom line, but it will also increase your owner’s equity. 

By minimizing expenses, you can increase the amount of equity and make your business more attractive to potential lenders and investors. 

There are a number of ways to reduce expenses, including negotiating better terms with suppliers, cutting unnecessary costs, and increasing efficiency. However, before you can reduce expenses, you need to have a system for tracking them. You can use your accounting software, an app, or even a small business expense tracking spreadsheet. 

By taking a diligent approach to expense management, you can ensure that your business is financially viable. 

Do Not Take Distributions (Or Dividends)

One way to increase owner’s equity is to avoid distributions and dividends. This can be beneficial because it allows the company to reinvest its earnings and grow the business. In addition, it can help to build up a cushion of cash that can be used in case of unexpected expenses or opportunities. 

Of course, there are also downside risks associated with this strategy. If the company’s earnings decline, then equity will also decline. In addition, if the company needs to raise cash for any reason, then it may have to issue new equity or take on debt. As a result, this strategy should only be pursued if the company is in a strong financial position and has a solid plan for growth.

Equity is an important part of any business and should be considered when making decisions. By increasing it, you are putting yourself in a better position to run your business successfully. There are many ways to increase your equity and we have outlined some of the most common methods. 

If you still aren’t sure how to calculate and record owner’s equity (or if you just want some expert help), consider an online bookkeeping service. Xendoo’s bookkeeping plans come with balance sheets and can include equity figures as well as other financial reports. 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

What Is the Bad Debt Expense Formula?

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When a small business makes sales on credit, there’s a chance of having bad debt expenses. Most businesses use the bad debt expense formula to account for them. 

Even the customers with the highest credit record can go bankrupt and fail to pay their debts. Tracking and recording these debts gives you an accurate picture of your financial standing.

In this post, we will dig deeper into how to calculate bad debt expenses and what they mean for your business. 

What Is a Bad Debt Expense?

When a company sells goods or services on credit, the risk of customers failing to pay the amount owed is always there. The longer they take to clear the payment, the higher the chances of not paying at all. 

Bad debt expenses are the part of accounts receivable that a company considers non-collectible. In other words, you were unable to collect payment for your product or service. Accounts receivable (AR) refers to the funds due to a company for products or services. It is the amount of money that customers owe you. 

After multiple unsuccessful collection attempts, businesses record bad debt expenses in the general ledger as a negative transaction. They are part of the operational costs under the income statement.

When Do Bad Debt Expenses Happen?

Bad debt expenses occur when a customer cannot pay outstanding bills for goods or services purchased on credit. Customers can fail to pay their bills due to financial difficulties or a disagreement over the delivered products or services. For instance, a customer may dislike how a printing order turns out and refuse to pay. 

If they make no effort to negotiate the payment terms for an extended period, you might consider writing their invoices as bad debts. Writing off these debts helps you avoid overstating assets or revenue while giving you an accurate picture of your company’s financial position. 

What Is the Bad Debt Expense Formula?

Accounting for your debts is good business practice. The bad debt expense formula accounts for the total bad debts from past sales. There are two ways to do this: 

  • Direct or write-off method
  • Allowance method

Let us look at each technique in detail.

Direct or Write-off Method

When many of your clients pay off their bills, and you have fewer bad debts remaining, you might opt to write them off one at a time. 

This mostly happens when the invoice surpasses the deadline, and it becomes clear that the customers won’t pay. The IRS states that you should only write off bad debts after you have made all possible attempts to recover the amount without success. 

So, if you cannot contact the buyer or develop a repayment plan with them after numerous attempts, it might be time to write off the bad debts. In such a case, you will make a simple transaction record in your ledger account where the bad debt expense equals the account receivable value. The write-off method has no formula since actual values are recorded as expenses in your book of accounts.

The write-off method may seem like an easier way to deal with doubtful debts than the allowance method. For one, you only have to record two transactions. Another upside is that it reduces the tax burden because you can write off the bad debt expenses from your taxable income. It also gives an exact amount of bad debts rather than an estimate.

However, there are downsides to using the direct write-off method. It fails to uphold the Generally Accepted Accounting Principle (GAAP) which states that businesses must recognize expenses during their incurred period. With this method, you might not recognize bad debt expenses until the next accounting period. Theoretically, this is not the correct way of identifying bad expenses. Another downside is that, since you record it as a credit to accounts receivable, it can cause balance sheet inaccuracies.

Allowance Method

With the allowance method, you account for bad debts ahead of time. If you do a lot of product or service deliveries on credit, you’ll want to use the allowance method. 

Also known as allowance for bad debts, this method sets aside a percentage of overall credit sales for bad debts. 

Using your historic or past data on bad expenses, you predict the percent of future bad expenses from all credit sales. The allowance is always an estimate because you are trying to predict the future based on the past. However, it can help you plan ahead for bad debt expenses and budget appropriately. 

You can use the bad debt expense formula to estimate the amount that you need to set aside. 

  • Percentage of bad debt = total bad debts/total credit sales

For example, assume your business has been operating for several years and the overall credit sales in the last accounting year were $500,000. Out of the total credit sales, $50,000 ended up being non-collectible. 

You’ll want to account for these bad debts prior to the next accounting year by setting up an allowance. Here is how to do it.

  • Percentage of bad debt = $50,000 (total bad debt expenses) / $500,000 (total credit sales)

That gives you a bad debt allowance of 10%.

If this estimate is practical for future unpaid invoices, create an allowance for doubtful accounts at 10% of this year’s anticipated credit sales. 

If your business is relatively new, the allowance method may not be accurate or reliable. It also will not work if you have a massive non-recoverable debt that is considered an outlier. The large amount can skew your bad debt allowance.  

How to Record Bad Debt Expenses

Keeping a record of bad debts helps maintain balanced statements while allowing you to make better financial decisions. Nonetheless, you can only record bad debts if you use accrual-based accounting. Those using cash accounting principles cannot do this since they have no recorded bad debt to undo or balance.

Recording bad debts using the direct write-off method involves debiting the expense account and crediting the accounts receivable with the exact value.

For the allowance method, you should record your estimated bad debts as a contra asset account. If you are wondering, a contra asset account has a negative or zero balance. This method involves debiting your expense account and crediting the doubtful debts allowance with the same value here. 

Bad debt expenses can bring significant losses to a business, especially those with a large portion of credit sales. However, tracking them paints a clear picture of your cash flow and financial position.

If you need any help streamlining your accounting, Xendoo can help. We have accounting software and a team of bookkeepers to prepare your financial statements every month. Contact us now for a consultation or begin your free trial. 

 

 

 

What Is Net Income Formula and How to Use It

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Net income is one key metric that you can use to assess your business’s financial health. It is the bottom line on your income statement, also called a Profit & Loss Statement (P&L), and it tells you how much money you have remaining after deducting your costs and operating expenses from your total sales.

What Is Net Income?

Net income can be compared to “take-home pay” for an employee. It’s the amount of money remaining after taxes, insurance, and other expenses are deducted from your total pay or gross income.

Similarly, the net income for a business is the amount of money remaining after deducting all business expenses, including wages, interest, product costs, operation costs, and taxes. Net income, also known as the bottom line, net earnings, or net profit, appears at the bottom of income statements.

Net income as it appears on an income statement

Generally, a healthy, growing business will have net incomes that are positive and increasing consistently. In other words, the more you increase revenue and decrease expenses, the healthier you are.

The net income or net loss of your business may also show up on your balance sheet as retained earnings. Retained earnings are the amount of money that is held (not distributed to shareholders) to sustain and grow the business.

How Do You Calculate Net Income?

The net income formula helps calculate the net income of either an individual or a business. 

For individuals, calculating net income is fairly straightforward. You take the total amount earned (gross income) and then deduct all expenses, such as interest payments and taxes. For a business, it is a little more complicated. 

Net Income Formula

Businesses can use the net income formula to calculate net income for any timeframe. There are two primary ways to calculate net income–using revenue and expenses or gross profit and expenses. We’ll go over each net income formula and how to use them. 

Total Revenue

  • Total Revenue = Quantity Sold * Price – Discounts

Cost of Goods Sold

COGS is the cost of the product or the service being delivered. If you have a t-shirt company, it is the wholesale cost of the t-shirt, plus freight, labor, and printing costs.  If you provide consulting services, it is the cost of labor to provide the consulting.

Gross Profit

Gross profit represents to profit made on the sale of the product or service.  This provides insight into whether your pricing is bringing you the profit desired on each sale.

  • Gross Profit = Revenue – Costs of Goods Sold 

Operating Expenses

Operating expenses are the costs of running the day-to-day business including advertising & marketing, rent, payroll, insurance, software, website, postage, auto expenses, meals, travel, and more.  These are the below-the-line (Gross Profit) costs.

Net Income

  • Net Income = Gross Profit – Operating Expenses

It’s important to note that net income can actually be a net loss.  If your operating expenses exceed your gross profit, it results in a net loss.  When your operating expenses are less than your gross profit, it results in net income.

Often, when a business is in start-up mode, a net loss is not surprising.  Although there is a tax benefit to a Net Loss, it doesn’t lead to a sustainable or scalable company without further investment.

It’s also important to note that net income may include revenue that does not come from your core business activities. For example, if your business owns real estate and rents out part of it, or you gain royalties from a past partnership. This is generally referred to as non-operating income. 

Business Net Income Example

To fully understand the net income formula, let’s look at a hypothetical business scenario. 

Marcus’ Archery, a company specializing in manufacturing and selling archery equipment, wants to calculate its net income for the fourth quarter. Here are the necessary figures to calculate net income from its accounts: 

  • Total Revenue: $20,000,000
  • Costs of goods sold (COGS): $8,750,000
  • Rent: $150,000
  • Utilities: $40,000
  • Payroll: $250,000
  • Advertising: $70,000
  • Interest expense: $70,000

According to the net income formula, Marcus’ Archery first needs to calculate Gross Profit. You would do this by subtracting the costs of goods sold, including direct labor costs, from the total revenue. 

  • $20,000,000 (Total Revenue) – $8,750,000 (COGS) = $11,250,000 (Gross Profit)
  • $150,000 (Rent) + $40,000 (Utilities) + $250,000 (Payroll) + $70,000 (Advertising) + $70,000 (Interest Expense) = $580,000 (Total Expenses)

With all these results, Marcus’ Archery can now calculate its net income. To do this, you use the net income formula and subtract total expenses from gross income.

  • $11,250,000 (Gross Income) – $580,000 (Total Expenses) = $10,670,000 (Net Income)

Overall, the fourth quarter’s net income for Marcus’ Archery is $10,670,000.

Cash Flow vs. Net Income

These are simplified explanations of how to calculate net income. However, net income does not equate to how much money is in the bank.  We often hear questions like, “I made $100,000 this year, but why don’t I have $100,000 in the bank.”  That is because cash flow is very different from net income

Factors like credit cards, business loans, owner’s payments, or investment income affect the money in the bank but aren’t factors in net income. You can learn more about cash flow vs. profit and how to use cash flow for decision-making in our blog on it. 

Individual Net Income Example

We focus on business bookkeeping and accounting at Xendoo. However, looking at an individual net income example can help you better understand how it differs from calculating the net income for a business.

Let’s consider Nancy, an employee at a local ski shop. Nancy receives her paycheck every two weeks with gross pay of $4,500. She also receives $200 in interest and $600 in equity as her other forms of income.  

She then pays all her taxes including: 

  • Social Security taxes ($279)
  • Federal taxes ($450)
  • State taxes ($163.91)
  • Medicare taxes ($65.25)
  • Insurance ($280) 

Usually, these are automatically taken out of your paycheck. After all these deductions, Nancy is left with a net income of $4,061. Here are the exact steps to calculate it. 

  • Gross Income – Total Expenses = Net Income 

For Nancy, the math would like like this: 

  • $4,500 (Gross Pay) + $200 (Interest) + $600 (Equity) – $279 (Social Security Tax) – $450 (Federal Tax) – $65.25 (Medicare Tax) – $163.91 (State Tax) – $280 (Insurance) = $4,061 (Net Income)  

Because Nancy’s gross income includes equity and interest, it totals $5,300. Based on her biweekly paycheck, Nancy takes home an annual net income of $105,586. 

How Xendoo Can Help

Net income is a critical metric for any individual or business’s financial health. The monthly income statement report details how effective the sales and operations process is at achieving financial success.

At Xendoo, generating up-to-date net income reports is one of the many bookkeeping and tax services you can access from our organization. 

With Xendoo, you get a team of real people and bookkeepers who dedicate their skills and expertise to the success of your business or individual finances. Additionally, we integrate our services with the best software to ensure all your accounts are accurate. Get started today to meet your dedicated CPA team and expert bookkeeper.  

 

 

How to Set Up Accounting for a New Business: A Full Guide

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If you are reading this, then it probably means you’ve just launched or intend to start a new business in the near future. As you try to figure out which need to prioritize in your new venture, it is crucial that you first learn how to set up accounting for a new business.

While it might seem mundane, good accounting is integral to the success of any business. You may have the best managers and staff, but it’s impossible for your business to flourish without properly monitoring and managing your money.

An experienced accountant can help you get your business set up faster and create a system for accurate accounting that grows with your business. However, we know that money can be tight for new business owners. 

Learning the basics of accounting can help you better understand the inner workings of your new business. As you grow, it’s easier to outsource or delegate the responsibility to a professional, so you can focus on other parts of your business. 

If you are only just starting out and have no clue where to begin, this article is for you. We will take you through the essentials of setting up your accounting for a new business.

1. Separate personal and business finances

As any established business owner will tell you, you need to treat your business as a separate entity to yourself. This means separating your business and personal finances.

In fact, it is a legal requirement of LLCs and corporations to manage their business incomes in separate bank accounts. On the other hand, sole proprietors have a bit of leeway. They can use their personal accounts for business, but we strongly advise against it.

Here’s why:

  • It will make it easier to file taxes for your business (since they are separate from your personal accounts)
  • Your accountants and bookkeepers can monitor the account more freely
  • It protects your individual assets in case of lawsuits or bankruptcy
  • Having business financial records will increase chances of getting funding from investors or creditors
  • It makes it easier to monitor your business cash flow

Separating your business accounts go beyond setting up separate bank accounts. Here are some additional steps for new business. 

Establish your business officially

Before you can get your business a bank account, you’ll need to register it with the state. Your business needs a name and other personalized details for you to open an account.

Get a business bank account

Just like you would a personal account, you should open both a checking and savings account for your business. This way, your money can be kept in an organized manner.

The rule of thumb is to keep a majority of your revenue in the checking account and then a small portion in the savings account to cover such things as emergencies and taxes. It is recommended that you set aside and save at least 30% of your total income for taxes.

To open a business bank account, you’ll need a few details. They include:

  • Business name
  • Business license
  • Social security number
  • Employer identification number
  • Organizing documents

Get a business credit card

Getting a business credit card comes with its share of benefits, but mainly, it will help establish a credit rating for your business. With the right card at hand, you can even get travel points or back cash rebates each time you make a purchase.

Track business expenses

Other than preventing instances of petty theft, tracking your expenses can help save a ton of money in tax deductibles. If you are keen, you’ll find a plethora of small expenses within your business are tax-deductible, meaning you can claim them on your tax return. However, the condition is that you have records of the expense.

The IRS demands that you have with you any documentation proving income credits or deductions that appear on your tax return. A few fundamental documents you should make sure to keep include:

  • Credit card and bank statements
  • Bills
  • Receipts
  • Invoices
  • Canceled checks
  • Proof of payments  
  • Previous tax returns    
  • Financial statement from your bookkeeper      
  • W2 and 1099 forms

Now, as you may know, storing paper receipts can get a little messy. And while they can just as easily be stored in a shoebox, it is better to keep them in an organized manner to allow for easy tracking. You can store them in a file, organize them by date or alphabetical order, or use an expense tracking system.

Alternatively, you can take photos of the paper receipts and store them online using software like QuickBooks online. If they are electronic receipts, you can either leave them stored in your computer or online storage systems like Expensify.

2. Choose a bookkeeping system and accounting method

Before we get into accounting methods, it is important to know what bookkeeping entails and how it all fits in.

To break it down, bookkeeping is simply the day-to-day act of recording transactions in business and reconciling bank statements. Accounting, on the other hand, is a higher-level process. It involves closely examining how the company is progressing and using data obtained from bookkeeping to build financial statements.

How to record business transactions

There are a few methods you can use to manage your books.  

  • DIY (by hand) – If you choose to do the bookkeeping yourself, you can make the entries manually using software like Wave or QuickBooks. First-time business owners that start with Excel spreadsheets regret it, so we advise using cloud accounting software.    
  • Outsourcing – If you’d rather spend your time managing other aspects of your organization, you can leave it to a professional bookkeeper. This can be either a remote or part-time local bookkeeper.   
  • In-house – This is usually the most expensive option. If you have the funds, you may employ a full-time in-house accountant or bookkeeper and leave everything to them.

Choose an accounting method

Once you have decided on a suitable bookkeeping solution, the next step is to determine which accounting methods to use. In this case, there are two main types: cash method or accrual method.

If your business is receiving revenue of $5 million each year, you can use either one to track the flow of money in and out of your business.

  • Cash basis method – Here, expenses and revenues are recognized the moment they are actually paid or received to or by the business. It is the most commonly used accounting method by individuals to balance their books.
  • Accrual method – In accrual accounting, any income or expenses are recognized the moment the transaction happens, regardless of whether the cash has arrived or left the bank. You’ll need to track payables and receivables.

Now, of the two, new businesses are better off using accrual accounting. With accrual accounting, the transactions are recorded early on in the process. With this, the business can better track accounts receivable and accounts payable. Ultimately, you get a more realistic view of foreseeable future profits.

Also, once any business reaches the $5 million a year in revenue mark, it is legally required to use accrual accounting anyway. Therefore, if you use accrual accounting from the start, you won’t need to switch methods once your business grows.

Determine how you’ll be paid for your products or services

Unlike the olden days, where you could only get paid in cash, there are now a variety of payment systems that customers can use. This can either be online, in person, or using a point of sale or POS system.

  • POS systems/in-person payments – POS or point of sales systems refer to payments made in person by customers at your store. An efficient system will accept payments and keep track of sales in the store. You can make use of various digital POS software that incorporate contactless payment options, mobile POS, and e-commerce capabilities.
  • POS payments only – If you’ll only be doing POS sales, you want to look for a POS system that will work with your cash register or a separate credit card reader. For this, you’ll have to open a merchant account that will act as an intermediary between your business bank account and the payment system.
  • Online payments only – if you’ll only be accepting online payments, you can use PayPal or Shopify if you are an online-based retailer.

Set up a payroll system

As your business grows, you might need to hire employees or contractors to assist run the business. In this case, you’ll have to establish a payroll processing system to handle payments.

For best results, you want a payroll system that automates most of the tasks and automatically dishes out the funds.

Also, as you add people to the payroll, it is important that you place them in the right category. Either as independent contractors or employees. Failure to do so might result in penalties from the IRS.

Determine tax obligations

Your tax obligations will depend on your business legal structure. For instance, if you are a sole proprietor, self-employed, partnership, or LLC, you can claim business income on your personal tax return.

On the other hand, corporations are taken as separate entities and are therefore taxed separately from the owners. Therefore, you will be taxed independently as an employee of the corporation.

If you are self-employed, you’ll need to withhold taxes from your income and then remit them to the government the same way an employer withholds taxes from their employee’s pay. If you owe upward of $1,000, you’ll have to pay estimated quarterly taxes(four times a year).

3. Set up an online accounting system

Once you’ve established the steps above, all that is left is to set up an online accounting system. The easiest way to do this is by using cloud accounting software such as QuickBooks. Usually, it will come with everything you’ll need to record, analyze and report your business transactions.

Can you do accounting on your own?

If you are only just starting out, this might all seem like a lot. You might be wondering: is it really possible to do accounting on your own?

Well, to answer the question, yes; it is entirely possible to do accounting on your own. How well you do it depends on the scale of the business and your depth of knowledge on the matter. As we saw, there are various online bookkeeping software options that can help record transactions and streamline various accounting processes.

Still, doing your own accounting has its downsides. It’s not only prone to errors but will also take time away from focusing on other business activities. To do it successfully, you’ll need to have an aptitude for numbers and a general understanding of basic accounting practices and business taxes.

4. Outsource your accounting

If your heart’s not in it, you’d be better off leaving it to a licensed Certified Public Accountant (CPA) or a professional virtual accounting team like Xendoo. We not only have the knowledge and accounting tools, but also the experience of navigating all the balance sheets, chart of accounts, complex sales tax regulations, and rules.

Xendoo will also help with such things as lease negotiations, ongoing tax reporting, cash and treasury management, and developing long-term strategic plans for your finances.

Every entrepreneur faces challenges when starting a business. To get your business off the ground, you are going to need all the help you can get. Hopefully, by following the steps above, you have one less thing to worry about.

Of course, you don’t have to carry the weight on your own. If you’d rather focus on other aspects of your business, Xendoo is here to assist. With years of experience managing books, our professional accounting team is more than ready to help with all your accounting, bookkeeping, or tax needs. So feel free to contact us today and chat with one of our agents.

How Long Does It Take an Accountant to Do Taxes?

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An accountant reviews tax forms.

An accountant reviews tax forms.

As tax season looms, you may be wondering whether you should have an accountant prepare your taxes. In addition to considering how much an accountant costs, you’ll also want to consider how long an accountant will take to do taxes compared to trying to do it yourself.

How do you know when to bring in a tax professional? Complicated tax situations like inheritance, small business taxes, or other big life changes usually warrant bringing in a certified public accountant or CPA. 

How Much Time Does it Take an Accountant to Prepare Taxes?

The time it takes an accountant to do taxes depends on the complexity of your return and how quickly you make your tax information and necessary documents available to them. 

It is better to plan ahead before the tax filing deadline. You can ask an accountant to have a better understanding of the timeline required to complete the process. There are a few ways that you can speed up the process.

Cost and Time Considerations

A number of factors affect the time it takes to file taxes. Not all of these will be the responsibility of the tax preparer. 

First, you must make sure that you have all of the required documentation available for the tax preparer. Documentation includes any statements of income you have received from an employer or other entity, as well as any other tax forms for expenses. 

Some of the most common forms include: 

  • W-2
  • 1099-NEC
  • 1098 

The W-2 is used to report income earned from an employer, as well as the payment of any taxes. A 1099-NEC includes independent contractor earnings. The 1098 form is a statement of any mortgage interest or insurance premiums paid. 

Deductions are another consideration. If you prefer to itemize rather than take the standard deduction, you’ll need to have receipts available. 

Typical items that are itemized include:

  • Medical and dental expenses
  • Mortgage interest
  • State or local property tax

All of your receipts should be organized and provided to your tax preparer.

Tax Preparation for Small Business Owners

Business owners will have more complex taxes. Businesses are able to claim certain deductions for expenses incurred throughout the year, but they need to have appropriate evidence of these expenses. 

Gathering this documentation may take some time, especially if you haven’t kept track of your receipts during the year. Online accounting software can assist in managing small business income and expenses.

The cost of the tax preparation and filing varies. More complex returns will incur higher fees. Often you may offset the cost of these services with your tax refund if you are eligible for one.

If you choose to use a local accounting firm that specializes in tax return preparation, you will pay significantly more. However, if your tax situation is complex, it pays to engage the services of true tax professionals. 

Xendoo has a variety of plans that are priced to meet tax needs for businesses of all sizes. The accounting team will be familiar with tax law and tax code and can make sure to include all deductions available to you. Xendoo’s team can also assist you with tax planning to mitigate your tax expense in future years.

How Much Time Do You Spend Preparing Your Return?

If you have filed your own tax return in prior years, you may have spent a significant amount of time to ensure you filled it out properly. When you did, you likely had to gather all of your tax forms and expense records. Then, check that you included each applicable tax form, including form 1040. 

You may have struggled with situations that required more complexity, such as capital gains or business deductions. Perhaps you had significant medical expenses that required you to itemize rather than take the standard deduction. 

Whatever the reason, you likely spent significant time and effort preparing your own tax return. At the end of the process, you may not have even been entirely comfortable that your return was correct. This oversight is why it makes sense to hire someone to handle tax preparation for you.

Plus, if you have errors in your tax preparation, it can slow the process down. Tax professionals can prevent common errors so that your taxes are filed faster. 

Is It Worth Getting an Accountant to Do Your Taxes?

There are three main types of qualified tax preparers. These include enrolled agents (EAs), certified public accountants (CPAs), and tax lawyers. Other individuals may prepare taxes through retail firms, but often they will not have received education specific to tax. 

Thus, if your tax situation is complex, it makes sense to hire someone to prepare your taxes who has the education and experience that fits your particular situation.

While there is an expense associated with hiring a qualified tax preparer, doing so saves you time, energy, and potentially even money. Tax preparers are generally familiar with most of the IRS tax code and must stay up to date on any changes that are made. They will be aware of deductions that you may not know you qualify for. 

If you own a business, it is likely that you will need the services of a tax preparer. Business taxes are typically much more intricate than personal tax returns. 

They involve a number of different considerations, especially if your company has employees, equipment, or investments. Tax consulting services can assist you with ensuring your business tax return is properly completed.

Tax Accounting Software

Some people decide that engaging the services of a professional isn’t necessary, especially if they have simple returns and have some knowledge of tax. They may choose to utilize tax software to prepare their returns. 

To prepare yourself for tax time, there are a few online accounting software options that may help.

When you get a Xendoo plan, you can also sync to online accounting software and tools through our partners. These include:

  • Xero 
  • Quickbooks

Although these tools can make the tax filing process easier, there is still some heavy lifting that you need to do. Xendoo comes with accountants that can advise you when filing tax returns.

There are a number of factors that impact how long it takes to complete income taxes. To speed up the process, store all of your tax-related documents throughout the year and keep them organized.

For small business owners and more complex tax needs, using a tax preparer like Xendoo can save time and money. If your return is complicated, consider small business tax preparation services.

Accounting for Startups — Starting Off on the Right Foot

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Author’s Note: This blog post was updated on February 22, 2022, to include new information, resources, and links.

Accounting for startups means more than just keeping up-to-date financial statements and records. Startup founders wear many hats, from sales to accounting.

Accounting may not be on the top of the list, but it is critical to business health and growth. A business that sets appropriate accounting policies from the beginning will have a better chance of success than one that doesn’t.

Does a Startup Need an Accountant?

When opening a new business, there are many decisions to be made. Startups may not need to have an accountant on staff if the business is simple and hasn’t generated a lot of revenue yet. As a startup grows, it will become more important to have the right accounting tools and expert advice. 

Business owners gain a competitive advantage by having a strong accounting system set up from day one. An accountant helps startups plan for the future. They can assist with services like payroll, catch up bookkeeping, tax planning, and more.

Why Is Accounting Important for Startups?

When first launching a business on a tight budget, it’s tempting to choose a cheaper accounting solution such as Excel spreadsheets. However, that “cheap” solution can turn out to be more expensive. It can’t prevent human error, can cost many unnecessary man-hours, and in the end, not meet your needs.

Instead, it’s wise to have an accounting strategy planned out in advance. Working with Xendoo’s accounting system you can accurately account for all of your company’s financial needs. 

For example, accurate accounting records can assist startups in obtaining a business loan or investment. Both investors and commercial lenders will look at your books during the funding process. They will be more likely to supply you with funds when you show a clean set of accounting books.

However, accounting services can help startups with many more aspects of their business.

What Are the Benefits of Startup Accounting? 

Not having proper accounting records from the inception of your business can result in problems down the line. Xendoo uses a cloud-based accounting system for the many ways it saves startups time and money.

There are several benefits of using a cloud-based accounting system. Here are a few ways that Xendoo helps startups with their accounting.

Startup Accounting Expertise That Scales

If you are unsure about how to handle accounting tasks (or simply don’t have the time to do so), it’s worth the cost to use a service like Xendoo that specializes in accounting for startups.

Your accounting should scale with your business needs. As your business grows, its accounting gets more complicated. 

If you choose to handle accounting tasks on your own, you may find yourself stretched for time. Instead of focusing on scaling the business, you may spend too much time on administrative work.    

Time-Saving Accounting Automation

Xendoo can sync with your bank, so every transaction is automatically entered into the bookkeeping system. It saves many hours of work and avoids the risk of error when a human operator transcribes the numbers.

Instead of spending lots of time at month-end trying to reconcile financial transactions in the general ledger, cash transactions have already been booked accurately. You no longer need to wait for bank statements or credit card statements.

You can know your cash position by having your cash transactions automatically posted in real-time. You’ll be able to make better decisions on upcoming expenses and have better insight into the financial health of your business. 

Other entries may also be recorded automatically, such as depreciation on equipment or other fixed assets. 

Cost Savings

Xendoo can save you serious money on your office staff. You may be employing multiple staff members to handle your accounting tasks, but it may not be necessary. Our trained accountants can handle the accounting transactions for multiple industries, including ecommerce, professional services, and retail. 

Our expertise allows us to easily accommodate the needs of your business. The cloud-based accounting system ensures that your financial records are up-to-date and accurate. Plus, you can message your Xendoo CPA team anytime for a fast response.

Offering more remote and part-time work options enables you to reduce your full-time office staff, as well as the overhead costs of accommodating them. Because data is stored in the cloud and not your servers, IT expenses can be trimmed.

Employee Tax Forms and Payroll

If your startup hires employees or independent contractors, accurate records become even more important. A startup accountant can ensure that payroll is handled properly and the requisite taxes are withheld and paid to state and local governments.

There are other tax issues that a startup accountant may assist you with, such as sales taxes, local taxes, and accounting for any fixed assets. Accurate records will help you prepare for your business tax returns at year-end. 

From a tax perspective, startup founders can save a lot of time and effort with books that are ready to go for tax season. There’s no need to scramble for records related to business expenses — they’ll already be recorded in the Xendoo cloud-based accounting system.

Financial Reporting

One huge advantage of working with Xendoo is that you’ll have an accounting system in place that provides you with the reports when you need them. You don’t have to read paper receipts or sit at your office computer to see financial reports or bank transactions. 

This enables you to respond to changing conditions as they happen, minimizing the risk of losses or missed opportunities. Xendoo provides accurate financial reporting, including a balance sheet and income statement. 

The accounts payable and receivable reports include an overview of outstanding accounts, so you can make quick business decisions based on current information. Startup accounting with Xendoo can also help you reach out to customers who are overdue on their invoices.

Complete, accurate, and up-to-date financial reports are available at any time. Every entry is tax-coded, so no extra work is needed to prepare for filing taxes or being audited.

Financial Planning

Another advantage of using Xendoo is financial planning and cash flow statements. A strong understanding of your current cash position can assist with making adjustments to your business strategy as needed.

A basic spreadsheet can’t tell you much about your financial big picture or warn you when things aren’t going according to plan. Xendoo’s monthly P&L statements show where you stand and what needs adjusting at a glance. The CPA team can also offer expert advice on planning for the future. 

Don’t waste time with Excel spreadsheets that can quickly lead to an accounting mess. Instead, take advantage of a solution designed to assist startups as they scale for growth. An accurate reporting system set up from day one gives up-to-date information on the financial status of your business. 

Leave the accounting to our knowledgeable team that understands accounting for startups. Xendoo can assist you with accounting processes like compliance, reporting, and financial planning. 

The cloud-based accounting system is user-friendly, allowing you to easily view your accounting books at any time. Xendoo’s flexible plans are designed to take a business from startup to enterprise level. While Xendoo handles the bookkeeping, you can focus on making your new business the best it can be.

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Best Real Estate Accounting Tips for Agents and Brokers

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real estate accountants

Editor’s Note: This post was originally published in November 2019 and has been revamped and updated for accuracy and comprehensiveness. 

As the owner of a new real estate business, you’re probably aware of the unique characteristics of your industry. You take a personal interest in the real estate market, and you are excited to do great work for your clients, whether buying or selling pieces of property. 

But here’s the thing—running a real estate business is about more than making great deals. Accounting plays a major role in staying organized, managing taxes, and making smart decisions in any business. 

Why accounting is important for real estate businesses

Setting up your real estate accounting system the right way will enable you to minimize the labor and stress involved in large-value transactions, extreme income fluctuations, employee pay formulas, and government regulations.

These tips are for you if your business is:

  • Real estate broker or agent
  • Property management
  • Building construction
  • Residential sales
  • Real estate investment management

Another reason to keep accurate financial records is that you will probably have to show them to interested parties at some point. These entities include:

  • Lenders
  • Shareholders
  • Creditors
  • Government bodies (e.g., the IRS)

There are many motivations to keep accurate books. And, contrary to popular belief, doing so does not have to be a major headache or hassle. With a service like Xendoo, you can outsource your bookkeeping and tax work to focus on what you do best. For more information, check out this post on how to choose the right software to simplify your real estate accounting. 

Two men go over real esate regulations at their desk.

Learn the Regulations

Did you know that it is not just real estate transactions that local and state commissions oversee? These bodies also oversee the financial management of a real estate business, so playing by the rules is essential. Therefore, it’s a good idea to familiarize yourself with their requirements before making any decisions about your bookkeeping system. If the language is unclear, consult a professional accountant who specializes in real estate. It’s far better to spend extra time setting up your accounting procedures properly at the start than trying to untangle a mess when you run into trouble later on.

Choose Who or What Will Do Your Real Estate Accounting

For real estate professionals, the most viable options are:

  • Hire an accountant as a full-time employee
  • Outsource accounting services
  • Accounting software used by management or other designated employees

Hiring an accountant to work in-house is undoubtedly a powerful approach, but it will be costly and likely beyond the scope of many real estate businesses. On the other end of the spectrum, acquiring accounting software to manage the books yourself or amongst your team might be difficult if no one has proper accounting training or the time to dedicate to ensure your books are up to date. Even minor accounting mistakes can add up to bigger ones down the road.

It’s the middle ground – outsourcing accounting tasks to a third party like Xendoo – that will make the most sense for many real estate agents and brokers. This option keeps the costs down while still freeing up your time and utilizing experts to make sure the work is done properly. 

Select Your Accounting Method

You have two choices: cash basis or accrual. Once you make a choice, you must stick with it, unless you submit a change request to the IRS. (Your first tax return shows the IRS which one you chose in the beginning — you don’t have to submit any forms for that.)

Cash basis accounting is often preferred by small businesses because it’s easier to maintain, and it tells you how much money you actually have in the bank on any given day. Accrual accounting is usually the choice of larger companies because it portrays a more accurate portrait of your real estate business’s financial performance. Accrual accounting also allows you to better your long-term plan, which is helpful if you are thinking about expanding your business.

A real estate agent looks over his accounting charts on a tablet.

Create a Chart of Accounts

This complete index of your company’s transactions is essential for knowing how you stand. It will save you many hours of work when you need to measure performance, generate a report, locate past transactions, or prepare tax returns.

The chart of accounts is organized into categories for easy sorting and retrieval. These categories can be anything you need. Under Assets, they might include Cash, Accounts Receivable, and Vehicles. Under Liabilities, you might have sub-accounts such as Accounts Payable, Loans, and Payroll.

Keep Business and Personal Transactions Separate

Don’t fall into the bad habit of pulling out your business credit card or checkbook to pay personal expenses — or vice versa. Without fail, it will cause more problems than it solves, including inaccurate books, tax mistakes, and cash flow issues. 

Real estate accounting shouldn’t be complicated, and this is one of the golden rules that can keep things simple—don’t make personal purchases with business accounts. Opening a separate bank account and a credit card strictly for your business will also make you look more professional to your customers, creditors, and investors.

Fool-Proof Accounts Receivable

Collecting payments that are owed is one of the biggest headaches for small businesses. Prevent delayed and missed payments with an automated invoicing system that:

  • Sends invoices promptly
  • Includes all the necessary information
  • Offers several convenient ways to pay
  • Tracks and contacts delinquent payers

With an automated system in place, you’ll save time and avoid missing out on revenue that slipped through the cracks when you were too busy to track it down. 

Reconcile Your Bank Account Every Month

Reconciling your bank account means checking that the transactions listed on the bank statement match what you have in your books. This process will identify any discrepancies so you can figure out why they happened and make a plan for avoiding those issues in the future.

Usually, it’s something simple like a financial transaction that’s recorded in your books, but the bank hasn’t processed it yet. However, it could be a more severe problem such as data entry error, misunderstandings of using the bookkeeping system, or even theft.

A broker goes over his taxes for his real estate business.

Figure Out Worker Pay and Taxes

Your business may pay one or more of these types of compensation:

  • Salary employee
  • Commission employee
  • Salary plus commission employee
  • Independent sub-contractor

Ideally, you’ll have payroll software that can calculate them all, as well as track them for income tax withholding. Fees to independent contractors may be handled separately by accounts payable since these workers are not, by definition, your employees.

It’s not only the fees that you have to be aware of but also the proper paperwork for each type of employee. You’ll need to learn which tax forms to collect from employees (W-2) and contractors (1099) and how to report their income to the IRS.

At Xendoo, we can also help with payroll processing as an add-on service to our real estate accounting. You won’t have to worry about issuing and filing your W-2s or1099s, which means one less thing keeping you from focusing on your business. 

Make Professional Life a Little Easier

If all this seems overwhelming, consider outsourcing to financial professionals. Xendoo specializes in small business accounting. We’ll relieve you of all that work and worry with services that range from real-time bookkeeping to timely financial reports to preparing your tax return. 

 

See for yourself with a one-month free trial.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

How to Choose the Right Software to Simplify Your Real Estate Accounting

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Editor’s Note: This post was originally published in June 2018 and has been revamped and updated for accuracy and comprehensiveness. 

Let’s face it, bookkeeping for a business in the real estate industry is complicated. That holds true whether your niche is sales, management, construction, or tax and legal services. Unlike some other types of business, you must deal with variables like fluctuating income, expenses, payroll, and property values, not to mention a heavy load of government regulations.

All these factors must be accounted for completely and accurately to control profit margins, satisfy clients, and be prepared for tax filing. It’s a big hassle if you’re doing it the old-fashioned way, creating custom spreadsheets and writing down transactions in a ledger. However, the right real estate accounting software will do many accounting tasks for you automatically, leaving you free to focus on your core business.

Real estate business payroll

Processing payroll is a core function for any business. Using accounting software that takes some of the hassles out of completing payroll each period can save you time and keep your records accurate year after year. 

Your business may have one or more of these types of workers:

• Commission

• Salary plus commission

• Salary

• Independent subcontractors

As it relates to real estate accounting specifically, choose software with a payroll feature capable of calculating commissions and tracking those amounts for income tax withholding. Similarly, you should categorize payments made to independent contractors, as those are typically not subject to withholding.

A person works on their laptop.

Real-time remote work tracking

Whether your people are out on a building site or showing homes to prospective buyers, a cloud-based management app will give them access to the office. At the same time, the office is tracking their activities. Info on everything from materials used to schedule changes can be updated and shared with everyone in real-time.

A system that integrates all departments saves time and money for workers and managers. It also means that data from the field is incorporated into the books automatically, eliminating duplicated effort and potential errors for the accountant. The inherent challenge with real estate accounting is the many moving parts involved—everything doesn’t happen in the same place. Leveraging technology to automatically collect all of this information and incorporate it into a bookkeeping system is sure to lead to better results. 

Breeze through tax time

The topic of taxes will come up again and again in the search for the right real estate accounting software—and for a good reason. Taxes aren’t only necessary because they are a legal requirement but also because they can represent such a significant expense. If your real estate business holds properties, for example, the property taxes alone can take a big chunk out of your bottom line. 

You can’t get away from paying taxes, of course, but you can use good accounting software and a tax filing service like Xendoo to make sure you don’t pay more than your share. 

A real estate records her numbers for the week on a laptop,

Streamline operational expense recording

One of the best real estate accounting tips you can receive is to enter all of your transactions each day. Suppose you wait until a week before your tax return is due to get your books updated. In that case, you’ll be facing a major headache and the likelihood that there will be errors beyond tax filing. Keeping your figures up to date will also reveal when and where you’re losing money. This makes it easier to make sound decisions and avoid spending too much time on a losing endeavor. 

Consider accounting software that integrates with your bank, recording every transaction automatically and saving you a great deal of time and paperwork. Plus, you’ll be ready for an audit any day of the year. Many real estate professionals – and professionals in other industries – feel like they are constantly behind on accounting. The key to getting ahead of the game is not to spend more of your precious time on the task but rather to streamline it using the right real estate accounting software. 

Financial reports data access

Using cloud-based software allows you to see your financial reports or share data with your accountant anytime, anywhere. And with no need for in-house servers to store your data, you’ll mitigate the risk of losing your data and bring down IT expenses as well. If you are currently storing all of the financial data for your business on a single computer in your office, you are playing with fire in terms of data loss risk. Turning to the cloud leaves you with off-site storage that is backed up and secure. 

Two noteworthy options

Most real estate businesses won’t need to take their accounting software search beyond two of the market leaders—Xero and QuickBooks Online. Each of these options includes all of the features you are likely to need to keep the financial side of your business in order. And, as an added bonus when working with Xendoo, we can provide you with a discount on either one of these two excellent accounting platforms. 

Xendoo believes that cloud-based accounting is the right choice for any real estate business looking to increase growth while reducing inefficiencies. By automating bookkeeping chores, we eliminate the hassles, the mistakes, and more than half the costs of traditional accounting. Our real estate accounting service will leave your business ready at every moment to meet challenges and seize opportunities for success.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.