Recording Prepaid Inventory in QuickBooks

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You have placed an order with your vendor for inventory.  Your vendor requires either payment in full or a deposit (partial payment) before shipping the inventory to you.  How do you record this transaction in QuickBooks?  You don’t want to Receive Inventory because you don’t want your inventory quantities to show inventory that you don’t have.  What you want to do is show that you have prepaid for inventory and show a credit for the vendor you purchased the inventory from.

Go to Write Checks on your Home Page.  Enter the vendor name, date, and the amount.  Under the Expense tab click on Prepaid Inventory.  You may need to set this account up in your Chart of Accounts.  If so, add this account as an Other Current Asset type of account.  Enter the amount you are paying.  Use the description field to make notes on what this is for.  Click Save and Close.

When your inventory has arrived, go to Receive Inventory > Receive Inventory With Bill.  Enter the Vendor name, the date and a zero ($0.00)* for the dollar amount.  On the Expense tab click on Prepaid Inventory and enter the amount that you paid for the order as a negative dollar amount.  Click on the Item tab and enter all the items in this order and the amount as a positive dollar amount.  The negative and positive added together will equal the zero dollar amount of the bill.   Click Save and Close.

You are through with this transaction.  The transactions for the Vendor in the Vendor Center will show the check that was written and the bill that was created.  The Vendor balance will be zero (0.00).  The inventory balance will have increased by the amount you paid and the inventory quantity will be increased by the quantity you entered.

*If you made a deposit for the inventory rather than paying it in full you would enter the amount you still owed on the bill.  Under the expense tab you will enter the amount you prepaid as a negative dollar amount.  Under the item tab you will enter the total amount of the inventory you received.  Both of these amounts added together will equal the amount of the bill.

If you have entered a purchase order before you write a check, choose “no” on the pop up message that you have outstanding purchase orders.  After you have received your order and go to Receive Inventory with Bill, in the Enter Bill window click on Select PO at the bottom left of the window.  Pick the PO that you are receiving inventory for.  Enter the rest of the information as described above.

Before writing this article I researched this topic and tested several different ways to record a prepayment of inventory.  I found this method to be the simplest.  Please feel free to comment, make suggestions or ask questions.

 

Business Entities – What are the Tax Implications?

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Deciding what business structure to establish is an important decision for you as a business owner.  The type of business entity you choose will determine which income tax form you file.  It will also determine how you are paid by your business.  Before forming your business entity check with an attorney and accountant.

SOLE PROPRIETOR

A sole proprietor is the easiest form of business to establish.  This is an unincorporated   business with only one owner.  You should check with your state to see if you need to register your business.  You may also need to register your DBA.  Some localities also require registration.

You will not receive a paycheck as a sole proprietor, instead you receive a draw.  These draws are not company expenses, rather they are a debit to an equity account commonly called Owner’s Draw.  This reduces the equity you have in the company.  You do not withhold any taxes on a draw, you pay a self-employment tax when filing your tax return.  The self-employment tax includes the company portion of social security and medicare.  An sole-proprietor does not pay federal unemployment tax, check with your state to see what their requirements are.  You may have to pay worker’s compensation, again check with your state.

A sole proprietor files a 1040 U. S. Individual Income Tax Return, a Schedule C Profit and Loss from Business and a Schedule SE – Self-Employment Tax.  You may also be required to pay quarterly estimated tax.

PARTNERSHIP

A partnership is a business owned by two or more persons (or other entities).  Each person contributes to the partnership with some kind of capital, labor or skill.  Each partner shares in the profit or loss of the business according to their percentage of ownership.

Partners do not receive payroll checks, instead they receive either a draw or a guaranteed payment, or both.  A draw does not reduce expenses, it reduces the equity the partner has in the business.  A guaranteed payment is an expense to the business.  Partners do not have any taxes withheld on the draws or guaranteed payment, however, like a sole proprietor they may have to pay quarterly estimated tax.

A partnership does not pay income tax, any profits or loss “passes through” to the partners.  A partnership files Form 1065 U. S. Return of Partnership Income.  Because a partner is not an employee they will not receive a W2, instead they receive a Schedule K-1 (Form 1065).  The K-1 is due to the partners by the due date of the 1065 Return.

CORPORATIONS

A corporation is a legal business structure chartered by the state.  Shareholders of the corporation contribute money, property or both.  A corporation can conduct business, realize a profit or loss, pay taxes and distribute profits to shareholders.

The profits of a corporation are taxable income to the corporation and the dividends to the shareholders are taxable income on their personal income tax return.  This creates double taxation.  The dividends to a shareholder are not a deduction for the corporation and a loss is not a deduction for the shareholder.

A corporation files a 1120 U. S. Corporation Income Tax Return.  If a shareholder has received any dividends during the year, they will receive a Form 1099-DIV in January of the following year.

S CORPORATIONS

A corporation can elect to be an S Corporation by submitting Form 2553 Election by a Small Business Corporation.  All the profits, loss, deductions and credits will  “flow through” to the shareholders.  The shareholders will report any income or loss on their personal tax return.  This will allow the S Corporation to avoid the double taxation on it’s income.  The S Corporation is still responsible for taxes on built-in gains and passive income.

Shareholders of an S Corporation receive a distribution of the profit.  The distributions reduces the equity in the company.  Shareholders who work for the company are also employees and  should be paid a “reasonable” salary which is an expense.  Your tax advisor can help you in determining how much the “reasonable” salary should be.  Shareholders do not pay a self-employment tax on distributions, however the normal payroll taxes apply to salaries.

The S Corporation files a Form 1120s U. S. Income Tax Return for an S Corporation.  A Form 1120s Schedule K-1 is distributed to the shareholder.  The shareholder may also receive a  W2 if they received wages throughout the year.

LIMITED LIABILITY COMPANY

A Limited Liability Company can be comprised of individuals, partnerships, other LLCs and foreign entities.  Check with your state to see what they allow.  Owners of an LLC are called members.  Some states allow “single member” LLCs.  Again, check with your state to see if that is allowed.

There is not a specific tax return an LLC will file.  The IRS treats an LLC as a partnership, corporation or disregard entity (part of the owner’s tax return).  If there are two member of the LLC the IRS treats it as a partnership, if there is only one member then the IRS treats the LLC as a disregarded entity.  If you want your LLC to be treated differently than the IRS default for taxes you can file Form 8832, Entity Classification Election.

As you can see, there are lots of things to consider when starting your business.  Discuss all this with your tax advisor so that the decision on what entity is best for your business will cost you the least amount of money in taxes.

 

 

New Hire Reporting

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As an employer you are required to file a New Hire Report for all your newly hired employees to your state shortly after you have hired them.  This reporting requirement is part of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 signed into law by President Clinton.  This report helps the Office of Child Support Enforcement and the states match child support records with newly hired employees in order to locate parents who owe child support.

Who Should Be Reported?

All new employees should be reported, even if they only work one day.  All re-hired employees who return to work after being laid off, on leave without pay, or terminated.  Some states may even require new hire reporting of employees who are on leave with pay and then return back to work, such as teacher.  Household and domestic employees also need to be reported.  If you, the business owner, are an employee you also need to report yourself as a new hire.

Which Employees Are Exempt From This Law?

Employees who are exempt from federal income tax withholding.

Do I Report Independent Contractors?

There is no law at this time requiring you to report Independent Contractors, however, you can voluntarily report them.  The IRS provides guidelines on determining whether a worker is an Independent Contractor or employee.

What Do I Report?

You need to report your company information – FEIN, your State EIN, name and address.  The information you report for your employee will be their name, address, social security number, and date of hire.  Some states may require more information.

How Do I Report This Information?

There are different ways to report.  You can file electronically or report on a form by mail.  Most payroll programs have this report available as a form.  The form will pre-fill with the information after you have entered the reporting dates.  If you file electronically you can use the payroll program’s generated report for the information you need.

How Often Do I Report?

This is regulated by the states.  Check with your state.

How Do I Report Employees In More Than One State?

You can either report each employee to the state in which they are working, or to save time and money you can report all employees to one state.  You may be required to file a multi-state application form.  Check with your state.

For information on your state’s regulation visit State New Hire Reporting Websites.

Download Bank Transactions Into QuickBooks

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Does it seem like it takes forever to enter all your transactions into QuickBooks?  If you write checks directly from QuickBooks, those transactions are already in your register.  Also, when you receive payments from your customers, and make a deposit, those transaction are also in the register.  But, what about all the other activity that occurs that will change your bank balance? Your ATM withdrawal, your debit card purchases, automatic withdrawals for bill payments all need to be entered in your register before you can perform a bank reconciliation.

You can enter these transactions manually if you only have a few, but save yourself some time and use the Online Banking feature in QuickBooks to quickly add these to your register.  If you haven’t already done so, you will need to set up an account for Online services.  Go to Banking > Online Banking > Set Up An Account for Online Services.  Follow the prompts to set up your checking or credit card accounts.

Once your account is set up, you are ready to import your transactions into your QuickBooks file.  You can go to the Online Banking Center (Banking > Online Banking> Online Banking Center) and click on Receive Transactions.  This will connect you to your bank, enter your login information, find the statement you want to import and find the prompt to import as a .qbo file.  A pop up window will ask if you want to save the file or import the file.  You can import it directly into your QuickBooks, but I prefer to save the file to my computer.  After saving the file, go to File > Utilities > Import > Web Connect Files.  Browse to where you saved the file, click save.  You will receive a message that your transactions have been entered into QuickBooks.

If you have trouble downloading your transactions from the Online Banking Center, you can do what I do, login to your bank directly from your browser.  Then follow the steps above to import the transactions into QuickBooks.  After your transactions are imported you are ready to review them and add them to QuickBooks.  Click on the bank name in the Items Received box of the Online Banking Center.  If you are using the side-by-side mode, the transactions are on the left.

QuickBooks will attempt to match the imported transactions to existing register transactions.  At the top of the Downloaded Transactions box is a line that says Matched to Existing QuickBooks/Register transactions.  Click on show to see what these transactions are.  These will be transactions such as checks and deposits that you have already entered during the month.  They do not need to be added to QuickBooks, they are already in the register.

The next line shows the number of New Transactions Created Using Renaming Rules.  You will want to review these transactions.  A renaming rule is when QuickBooks gives a vendor that has a several similar names one name.  For example, McDonalds1234 and McDonalds1243 would both be renamed to McDonalds.  It is a good idea to check how QuickBooks has renamed your vendors.  You can click on the Renaming Rules link at the top right of the window to edit the rules.  When reviewing these transactions, also check that they have been assigned the correct account number.

The last line shows Unmatched Transactions.  These transactions will need to be added to the register.  Highlight the transaction, click on the Payee Field in the Record an Expense box on the right.  Enter the vendor name and account number.  If you need more details, such as class, job or other details, click on the Show Splits, memo, date, number… link below the account field.

If there are transactions in the Downloaded Transactions window that have already been entered in the register, you can delete them before you add the other transactions to QuickBooks.  Click on the Select Items To Delete button at the bottom of the window, mark the transactions you are deleting and mark delete.  This is not reversible, if you delete anything that has not already been added to QuickBooks, you will have to manually enter it.

Once you have checked all transactions, mark the Add to QuickBooks button in the window on the right.  This may seem like it will take a while, but in reality it will speed up your data entry time.  Each month as more renaming rules are created, there will be fewer unmatched transactions to enter.  And you will wonder why it took you so long to get on the bandwagon!

One last thing, before importing your transactions, MAKE A BACKUP!

Chart of Accounts – How to Create

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Congratulations, you have started your own business.  You have purchased or rented property for your business.  You have furnished the space with everything you need to run your particular business.  You have hired employees to work for you.  Now you are ready to set up your accounting system.

One of the first things you will need is a chart of accounts.  A chart of accounts will allow you to organize your transactions into categories. When you record transactions, you will post them to an account and then you can print various reports using some or all the these accounts.

Depending on your industry there are some accounts you will need and others you don’t need.  For example, if you are in construction, you will need a WIP (work in process) account,  if you are a retailer, you will need an inventory and COGS (cost of goods sold).  A not-for-profit business will need restricted and un-restricted funds account, a law firm will need a retainer account to record deposits from clients.  These are just a few examples of the different accounts a business may need.

Depending on your accounting software, you may be able to choose your industry when setting up your chart of accounts.  If this is the case, choose your industry or the one closest to it.  Go through the accounts and delete the accounts you know you will never use.  Edit some of the other accounts, giving them names that make sense for your company.

If you have to set your chart of accounts up manually, it’s easy.  The first group of accounts are your Balance Sheet accounts.  All your asset accounts will be listed first.  List your current assets first, other current assets next, and finally other assets.  Next are your liabilities, listing your current liabilities first, then your short-term liabilities, and finally long-term liabilities.  Next on your list are your equity accounts.  Depending on your entity depends on the name of these accounts.  You will have at least two, your retained earnings (the accumulative sum of your net income (loss)) and your net income (the current year’s sum of your net income (loss)).  You may have other equity accounts such as a draw(s) account, treasury stock, etc.

The next group of accounts are the Income Statement accounts.  List your revenue accounts first, followed by COGS accounts and then the expense accounts.  If your software allows, you can assign numbers to your accounts with numbers starting with a #1 your asset accounts, starting with a #2 your liabilities, #3 your equities, #4 your revenues, #5 COGS, and #6 your expenses.

Some accounting programs will also let you use segmented account numbers, you can define how many segments your company needs, how many digits each segment is, etc.  This would be good for tracking revenues and expenses for departments, locations, etc.

I personally like to use sub-accounts when I set up a new chart of accounts.  The two accounts I use these on the most are the payroll liabilities and payroll expense accounts.  With the payroll liabilities account, the main account is called payroll liabilities and then each of the sub-accounts are named whatever the withholdings are, i.e. FICA & Fed W/H Payable, State W/H Payable, etc.

Don’t forget, when setting up your chart of accounts, to set up any contra-accounts you may need, for example, if you have a fixed asset account, you will also need an accumulated depreciation account.  But, don’t go crazy on creating your chart of accounts.  Only set up the accounts you know you need, you can always add more later.