Posts

a woman sitting in front of plants and looking at papers

What Is the Bad Debt Expense Formula?

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. 

 

 

 

how-to-set-up-accounting-for-new-business

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

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 methodHere, 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.

An accountant reviews tax forms.

How Long Does It Take an Accountant to Do Taxes?

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

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.

 

real estate accountants

Best Real Estate Accounting Tips for Agents and Brokers

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

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.

 

A painter looks at her phone and laptop

How Outsourcing Accounting Can Help Grow Your Small Business

Small business owners are notoriously short on time. They manage everything from sales and marketing to employee scheduling and benefits, not to mention being an expert in whatever good or service it is that their business offers. And there are hurdles every step of the way as you try to grow your business. Hiring an outsourced accounting service can help you tackle many of these including ensuring you don’t pay too much in taxes, that you have time to focus on sales and marketing, and that you are able to prepare thorough financial reports for investors.

Why is an accountant important in a business?

Accountants consider the big picture strategy needed to keep your business strong and growing. They can answer your questions about financial reports, cash flow, depreciation, and more. They can give tax savings advice, such as when to make capital purchases, what you can deduct, and how to reduce taxes on capital gains. They can identify opportunities to improve profit margin and business growth and keep you legal – preventing missed deadlines and noncompliance penalties. 

When you’re looking to grow your business but don’t have the time or resources to do so, hiring an outsourced accountant or outsourced accounting service like Xendoo can free up your time and provide insights and ways into how you can increase your cash flow, strategically prepare for your taxes, and focus on what you do best.

Closeup of two plant sprouts growing

How does outsourcing accounting help your business grow?

It’s not just keeping track of your financials. Outsourcing an account can help your business grow in the following ways:

Accountants help save money

We can tackle the reinvestment more in detail here and use the tax preparation anchor here. 

Accountants help small business owners save money in many ways, including through strategic tax preparation. They help you make smart decisions on your operating expenses, when to make big purchases, and what deductions you can make. Many small business owners spend too much money on taxes – an accountant can help you prevent overspending on taxes and help you strategize on how to cut costs in every area of operation. The money you spend on an accountant is an investment into your business and will help you grow by saving you money in the long run and leaving you with more money to invest back into your business. 

Accountants help save you time

Time can be spent on marketing and other business growth while they look into the books.

Small business owners have enough on their to-do list – when you’re looking to outsource some of the work and focus on growing, outsourcing accounting and bookkeeping services are the best choices. Bookkeepers and accountants will do a better job at a quicker pace than a small business owner who is strapped for time and whose talents might lie elsewhere. You’ll be able to focus on sales, marketing, and all of the other ins and outs of growing your business when you aren’t worrying about accounting.

Outsourced accounting services are scalable

As you grow so can your services without the need to hire FTE. 

Your outsourced accounting team can easily grow as your small business does. You won’t need to hire a full-time employee to handle your accounting when you have a scalable outsourced accounting team on board. You can skip the hassle of hiring and managing a full-time employee as you grow (and save on the need to offer expensive benefits, too!) by hiring outsourced accounting services like Xendoo.

Better business analysis

Gives you accurate insights into your business strengths and weaknesses, which is important if you want to expand. Investors will want to see accurate books. 

As you grow you will continuously need better analytics on your business. An outsourced accounting team can provide accurate insights into your business strengths and weaknesses, helping you strategize on how to grow. And when you’re ready to take on investors or apply for a line of credit the banks and investors will want to see accurate and detailed financial reports. By having an outsourced accountant on your team, you will be able to show investors and banks precise, up-to-date records and prove you take your finances and the growth of your small business seriously.

Help increase cash flow

Keep track of outgoing and incoming money. Can find ways to help you save money long term with paying on time or ahead, and chasing down delinquent invoices. 

A key strategy to growing your business is taking charge of your cash flow. Outsourced accounting services like the team at Xendoo can keep track of your incoming and outgoing money and can help you find ways to save money in the long term – through strategic tax preparation, cutting operational costs, and paying your bills on time or even ahead of time! And they can help you chase down delinquent invoices from clients who are behind on paying you. Your accounts payable and receivable will be closely monitored and managed without you ever needing to worry about it.

Outsourcing accounting can help you grow your business.  By outsourcing your accounting, you can save money on hiring a full-time accountant, plus, it will give you more time to focus on running your business and creating value for your customers and your employees.  Xendoo is all about providing timely and accurate financial information to business owners allowing them to make strategic decisions. If your business is struggling, know that there is a better way and Xendoo can help. 

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.

Important-tax-dates-for-Q3-and-Q4

When You Need to Hire a CPA

Bookkeeper? Accountant? CPA? Which one does your business need, or does it need all three of them? Actually, it depends. Staying on top of your business’s finances is key for a small business owner, but you may need more than day-to-day bookkeeping. When you have more questions than a bookkeeper can answer, you’ll probably need to look into CPA services. Fortunately, Xendoo has you covered. Read on to see if online CPA services are best for you and your business.

What is a CPA?

It’s important to understand the differences between a Certified Public Accountant, CPA, and a regular accountant. A CPA is an accountant who has met specific state and education licensing requirements and passed the CPA exam. So, accountants with the title of CPA offer a higher level of financial analysis for you and your business and can act as a fiduciary on your behalf.

At that same time, an accountant can give you tax savings advice, such as when to make capital purchases, what you can deduct, and how to reduce taxes on capital gains. They can answer your questions about financial reports, cash flow, depreciation, and other accounting processes and identify opportunities to improve profit margin and business growth. Additionally, they can help set up business accounting systems, teach you best practices, keep you legal, and prevent missed deadlines and noncompliance penalties.

What does a CPA do?

Certified Public Accounts can be the financial strategist for Fortune 500 companies or advisors to neighborhood businesses.  CPA act as consultants on many issues, including taxes and accounting. Generally, online CPAs services include:

  • Prepare financial statements
  • Identify red flags and growth opportunities
  • Prepare and file taxes
  • Plan capital purchases and other investments
  • Strategize for scaling the business

When should I hire a CPA?

Whether you’re starting or growing your business, an accountant can help set up financial systems and analyze data so that you can make smarter business decisions. They have the power to forecast business success, diagnose financial health issues, and increase revenue—saving you significant money, time, and hassle. 

So while a bookkeeper focuses on the everyday tasks that maintain your business’s finances, accountants consider the big picture strategy to keep your business strong and growing, and a CPA has an even higher level of financial analysis to assure you’re making the right moves at the right time.

How much does a CPA cost?

Budgeting for bookkeeping and accounting services is tough for a small business. Traditionally, bookkeepers have charged an hourly rate; the more time they spend on your books, the more you have to pay. Typical rates are:

  • Bookkeeper — $30 to $90 per hour
  • CPA — $150 to $450 per hour

Or you may only need an accountant for an occasional project such as tax preparation.

  • Tax return (unincorporated) — $200 to $500
  • Tax return (incorporated) — $800 to $1,800
  • Financial statement — $1,000 to $2,500
  • Audit — $2,000 to $5,000

This is why accounting for a small business can become expensive. Plus, you may decide you only need an accountant for an occasional project such as tax preparation, financial statement, or audit, which costs a fixed amount that can add up, or you may not have allotted this in your end-of-the-year budget. A popular option with small businesses is an accounting service that charges a fixed amount every month. It’s easy to budget for, and it can cost less than half what you would pay an hourly accountant for the same amount of service. That’s why Xendoo offers a monthly pricing structure to our clients, charging a fixed amount every month. It’s easier to budget for bookkeeping and inline CPA services monthly and cost less than half of what you would pay an hourly accountant for the same service amount.

The right account professionals for your business

A small business accounting service will file your taxes, but you’ll need to have your bookkeeping in order so you can provide them with the data and reports they need. Xendoo’s online team of bookkeepers and CPAs will handle everything for you – they will manage all of your bookkeeping and accounting and will file the right return for you, right on time. Plus, Xendoo also takes care of all the filing that goes along with your tax return to itemize your business deductions.

Ultimately, it’s best for you and your business to have both a bookkeeper and an accountant. Making Xendoo your financial partner means joining a community of small business owners who love working with Xendoo’s bookkeepers and CPAs. Xendoo’s online CPA accounting services are ideal for small businesses because the more eyes looking out for your business, the better. Your dedicated financial team provides the perspective on your finances that can help ensure you’re able to anticipate problems and have the appropriate solutions ready to go. In gaining a complete picture of your company’s financial health, you can confidently grow your business.

a coffee shop

Franchise Accounting: 7 Benefits to Outsourcing

As a franchise owner, you have more than enough to do just taking care of the core operations. Outsourcing support functions which are not your area of expertise — such as accounting — will definitely save you a ton of time and effort. But that’s just the beginning of what it can do for your business.

Professional accounting for your franchise brings peace of mind.

When a real CPA maintains your books, you can rest assured that it’s getting done right. Nothing is forgotten or entered incorrectly. Even if you plan to use your accounting system yourself, an independent advisor can help you set it up, teach you how it works, and make sure it has all the functionalities you need.

Accounting expertise is well proven.

Imagine working with an accountant who has been through an extensive vetting and hiring process by people in his/her own field. You’d feel more confident in that person than in someone you hired yourself, right?

Rookie mistakes don’t happen.

Are you sure you’re tax-coding transactions or categorizing your business expenses the right way? An accounting specialist can help you avoid that tax time nightmare. They can also advise on when to make capital investments for best tax savings, whether to take out another loan and how to improve cash flow, among other things.

Data entry and math errors are eliminated.

An up-to-date accounting service will use advanced technology that syncs with your bank, POS system, and management software to make bookkeeping automatic. With no human input, there’s no possibility of human mistakes.

Accounting Laws and regulations are met.

With tax and business laws changing at the speed of the internet, it’s almost a full-time job in itself to keep up with them. Better let someone who really does it as a full-time job handle this stuff for you.

Processes are always state-of-the-art.

When you or a staff member does the accounting in-house, you probably won’t be watching industry news and constantly upgrading to the latest technology, as an accounting company does. You benefit from their investment for a fraction of what it would cost to do it yourself.

Outsourcing costs less than a staff franchise accountant.

Many franchisees don’t really need a full-time accounting employee — they just need a few hours of work a week, plus the ability to call or email someone with questions. For that, you’re better off with a flat monthly fee to an outsourced accounting company rather than paying an employee’s salary or a traditional accountant’s retainer.

This affordable option is exactly what Xendoo offers to small business owners such as franchisees. Our flat monthly fee is less than half what you’d typically pay an hourly accountant, while providing you with at least double the speed and access to financial expertise. It’s easy to get started — just give us a call!

 

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.