Can You Read Your Balance Sheet?


This is an easy question, isn’t it? Maybe not. You know the formula, Assets = Liabilities + Owner’s Equity.  As long as it is in balance then everything is okay, right? Maybe not. It is important as a business owner you understand what the figures on your balance sheet are telling you.

Assets are the first section on the balance sheet. Your current assets are listed first. Current assets are cash or cash equivalents that can be expected to be converted to cash within a year. Your bank accounts are listed first and the normal balance will be a debit. If any of your bank accounts show a credit balance, that account is overdrawn as of the date of the balance sheet.

Accounts receivable will be the next current assets on your balance sheet.  This account will have a debit balance.  You will want to keep track of how many times your accounts receivable have been collected during an accounting period.  This is called an Accounts Receivable Turnover Ratio.  The better the ratio, the better you are using your assets.

The next group of current assets will depend on your type of business.  They may be customer deposits, prepaid expenses, inventory, employee advances, etc.  They should all have a debit balance and you can convert them into cash within a year.

The last group of assets will be your fixed assets.  These cannot be converted to cash within a year.  They will consist of your property, furniture and fixtures, equipment, automobiles, etc.  These accounts will have a debit balance.  There will be an accumulated depreciation account associated with these accounts that will have a credit balance.

If you have paid any security deposits it may listed under Other Assets on the Balance Sheet.


Your liabilities are what you owe to other companies.  A current liability will be paid off within a year.  Your current liabilities will be accounts payable, and all your credit card accounts.  These accounts should have a credit balance.  If an account has a debit balance you may want to investigate the reason.  For example, a credit card account may show a debit balance which would indicate that you have a credit due to you from them.

If you have employees, your other current liabilities will be payroll liabilities.  Depending on the number of employees and the benefits you offer your employees, you may have several liabilities, or you may have just the payroll tax liabilities.  Whatever liabilities you have, they should have a credit balance.  If a liability has a debit balance, then you have probably over paid and are due a refund.

Your long term liabilities are the debts that will not be paid off within a year.  They will be your mortgage payment, loan payments, vehicle payments,etc.  These liabilities will also have a credit balance.


This is the last section of your balance sheet and it shows how much  money has been invested in your company.  Depending on the type of entity, you may have an Owner’s Equity account, Capital Stock, or Treasury Stock account.  Your retained earnings account shows what your company has earned since the beginning of it’s operation.  Your retained earnings should be a credit if your company has been making money.  If your company has not been making money it will be a debit balance.  Dividends paid to shareholders, and draws to owners and partners will have a credit balance. 

In summary, your balance sheet is a snap shot of your company’s financial position at a single point in time.  The purpose is to give the users an idea of the company’s financial position along with what it owns and owes. It is very important that you understand how to analyze and read this document.

Business Expenses


As you are preparing your trial balance for the tax preparer, or even if you prepare the taxes yourself,  you will need to look carefully at the detail in each of your accounts.  What exactly is a business expense?  It is the cost of doing business and is usually deductible if the business is operated to make a profit.

There are several types of expenses: Cost of Goods Sold, Capital Expenses, and Personal Expenses.

Cost Of Goods Sold

A business that manufactures or produces goods for resale must value their inventory at the beginning and again at the end of the year to determine the cost of goods sold.  Some expenses may be included in this amount.  Cost of goods sold is deducted from gross receipts to determine gross profits.  An expense included in cost of goods sold cannot be included again as a business expense.

Expenses that go into figuring cost of good sold are:

  • the cost of raw materials or products, including freight
  • storage
  • direct labor cost for workers who produce the products (including pensions)
  • factory overhead

You must capitalize certain direct cost and indirect cost under the uniform capitilaztion rule.  Some indirect cost include rent, interest, taxes, purchasing, processing, repackaging, administrative cost and handling.

Additional informational can be found at Publication 538 Accounting Periods and Methods (p.14).

Capital Expenses

Part of the investment in your business are capital expenses and are considered assets to your business.  There are three types of costs you can capatilize:

  • Start Up Costs
  • Business Assests
  • Improvements

You can choose to deduct or amortize certain start up costs. Publication 535 Business Expenses (Chapters 7 and 8).

Personal vs. Business Expenses

Usually a personal expense cannot be deducted as a business expense.  If you use an expense for both personal and business, you can deduct the amount you use for your business.  For example, if you have a home office, you can deduct a portion of your mortgage interest, utilities, insurance, repairs, and depreciation.  If you use your car for your business, you can deduct your car expense.  If you use it for both personal and business then you will need to divide your business expenses based on actual mileage.

Other Types of Business Expenses

I’ve listed below a few other business expenses that can be taken as deductions.

  • Wages – the amount you pay your employees for their service is deductible.
  • Retirement Plan – this is money that you contribute for your employees that is deductible.
  • Rent Expense – you can deduct this if you rent the property for the use of your business.
  • Interest – interest expense on any loan is deductible.
  • Taxes – various federal, state, local and foreign taxes are deductible.
  • Insurance – ordinary and necessary insurance for your business is deductible.

I have not covered everything in the article you will come across while you prepare your trial balance, but a general guideline to follow.

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Basic Goals of Bookkeeping


There are two basic goals in bookkeeping.  Keeping track of your income and expenses so that you improve your chances of making a profit.  Collecting the financial information so that you can file all the necessary tax returns to the federal, state and local taxing authorities.

These sound simple, don’t they?  They are if you remind yourself of these goals whenever you feel overwhelmed by your financial situation.  There is no requirement that your financial information be kept in any particular order.  You can keep  your data in a high end accounting program, a less expensive program like QuickBooks, or even on paper ledger books.  It doesn’t matter, as long as you keep records of your transactions.  There is no “right way” as long as your books accurately reflect your business’ income and expenses.

The three steps outlined below explain how easy it is to keep your books:

  1. Keep every receipt or other record of payment and every record of expense for your business.  This is the heart of your accounting business.  They must be backed by the date, amount, and other relevant information about the sale.  This is true whether you record the transaction on a computerized accounting program or a paper ledger.  Choose your system wisely.  If you are a retail store you may need a cash register with a POS system that will integrate with the accounting program.  But, no matter what type of sales you have, choose one to adapt to your needs.
  2. Setting Up and Posting Ledgers. When setting up your ledger you will need to set up a chart of accounts.  Some accounting programs have sample chart of accounts for a variety of industries.  If your’s doesn’t or you are using a paper ledger, then you can create your own chart of accounts.  Decide how often you will enter (or post) transactions into your ledger.  A larger company may have to enter transactions daily, a smaller company less frequently.  Do it frequently enough so that you do not get behind.
  3. Creating Basic Financial Reports. Once everything has been posted for the month there are several reports that you can run to see what your financial position is.  A profit and loss statement will show your total income and expenses.  The difference will be the net income (loss). A balance sheet will show your total assets, liabilities, and total equity.  The balance sheet will also show other things. It will show the balance in your asset account for short and long term.  If you are on the accrual basis it shows what your accounts receivable balance is.  If you carry inventory, it shows the value of your inventory,  if you are a builder it will show your WIP balance.  On the liabilities side of the balance sheet it will show the accounts payable if you are on the accrual basis.  It also shows the loan balance for all the loans you may have.  The equity section will show retained earnings, if there are partners it will show the partners equity, it will show draws the partners or owners may have taken.  You can also compare one period to another period to evaluate your performance.

If you have any questions about anything in the article you can contact Top Notch Bookkeeping.  We provide online bookkeeping and payroll solutions for small business.  We are also Certified Quickbooks ProAdvisors.

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Preparing for Year End


This is the busiest time of year for bookkeepers.  If you are a bookkeeper for a small business then you not only handle the bookkeeping end of the business, you probably also handle the payroll.  And this can be a daunting task.  You are probably putting in overtime while other employees are taking time off or planning time off for the holidays.

One way to avoid the stress of the extra work required of you this time of year is to have a checklist of tasks that need to be done before the end of the year.  Eack checklist will be different depending on how much responsibility you have within your company.   If you have inventory and you don’t do inventory during the year you will want to schedule a time as close to the end of the year as possible to do your inventory.  Your tax preparer will need a number as close to accurate as you can get before he/she can prepare your tax return.

Other things you should have on your checklist should be purchasing the correct number of forms, althought you should have already done that by now.  You will need the W2 and W3, and the various 1099′s and 1096.  The number you will need depends on whether you will have to efile, but you may still have to send hard copies to recipients.

You will want to make sure that you have all the information you need for employees and that it matches the social security card exactly.  You need the name and social security to match, and the correct mailing address.  You also need an EIN (employer’s identification number) or social security number for independent contractors who did work for you during 2010 in which you paid $600 or more for services.  If their invoice separated labor and parts and the amount for labor is less than $600, no 1099 is required.  If their invoice is more than $600 and they didn’t separate the labor from parts, a 1099 is required.  Corporations do not get a 1099 for 2010.  Attorneys do get a 1099 for 2010.

Fringe benefits have to be reported as wages before the end of the year.  They can be grossed up or just added to the wages and then taxed.  Information for reporting fringe benefits can be found in Publication 15-B from the IRS.  All bonuses, cash, and the fair market value of gifts have to be reported as wages.

I have only listed a few things that need to be done to prepare for year end.  Each company is different.  If you have any questions, please contact me at (859) 309-2478.

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